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Rating Action:

Moody's downgrades Oman's rating to Ba3, changes outlook to negative

23 Jun 2020

New York, June 23, 2020 -- Moody's Investors Service, ("Moody's") has today downgraded the Government of Oman issuer and senior unsecured ratings to Ba3 from Ba2, and changed the outlook on the issuer rating to negative. This action concludes the review for downgrade initiated on 30 March 2020.

The downgrade reflects the conclusion that in a lower oil price environment, which Moody's now assumes will persist into the medium term, the government will unlikely be able to significantly offset the oil revenue loss and avoid a large and durable deterioration in its debt and debt affordability metrics or erosion of its fiscal and foreign currency buffers.

The Ba3 rating is supported by the government's access to a still relatively robust stock of liquid fiscal and foreign currency reserves, and scope to slow the pace of balance sheet deterioration through spending and revenue measures. The Ba3 rating also reflects Moody's expectation that some of the higher-rated Gulf Cooperation Council (GCC) sovereigns would be willing and able to extend financial support to Oman should the sovereign's ability to access external financing remain constrained for an extended period.

The negative outlook captures material government liquidity and external vulnerability risks related to the government's large financing requirements and diminishing external buffers, which Moody's expects in the next few years. Slow and narrow implementation of fiscal adjustment, a possibility in light of the government's limited track record in this area, could raise liquidity and/or external vulnerability risks further.

Moody's has also downgraded the Government of Oman senior unsecured medium-term note program rating to (P)Ba3 from (P)Ba2. Today's rating action also applies to Oman Sovereign Sukuk S.A.O.C, a special-purpose vehicle domiciled in Oman, and whose debt, in Moody's view, is ultimately the obligation of the Government of Oman. The entity's backed senior unsecured rating and the backed senior unsecured medium-term note program rating were downgraded to Ba3 from Ba2 and to (P)Ba3 from (P)Ba2.

Oman's long-term foreign currency bond ceiling was lowered to Ba1 from Baa3 and its long-term foreign currency deposit ceiling was lowered to B1 from Ba3. Oman's long-term local-currency bond and deposit ceilings are unchanged at Baa3. Its short-term foreign-currency bond ceiling was lowered to Not Prime from Prime-3. Oman's short-term foreign-currency deposit ceiling is unchanged at Not Prime.

RATINGS RATIONALE

RATIONALE FOR DOWNGRADE TO Ba3

LOWER OIL PRICES INTO THE MEDIUM TERM TO SHARPLY INCREASE DEBT AND ERODE DEBT AFFORDABILTY

The coronavirus-related global recession in 2020 and the slow recovery of overall economic activity will dampen demand for oil. Moody's expects oil demand to recover more slowly than overall GDP as activity in oil-intensive sectors such as travel remains restricted for some time. As a result, Moody's has revised down its oil price assumptions for 2020 and 2021 to an average of $35/barrel and $45 respectively (Brent) -- about $8 below the assumptions held when the agency initiated the review of Oman's ratings for a possible downgrade -- and its medium-term oil price assumption to $45-65/barrel -- around $5 lower than previously.

Moody's estimates that in this baseline oil price scenario, which also includes lower production, Oman's government revenue derived from oil and gas will decline by more than 12% of GDP in 2020.

Over the past three months the government announced several fiscal consolidation measures intended to offset some of the expected revenue losses. The most significant of these are a 10% cut in non-interest spending (excluding expenditure related to oil and gas production) in 2020, which could reduce spending by around 4% of GDP if fully implemented, and an introduction of the 5% valued-added tax from January 2021, which could generate up to 1.5% of GDP in additional revenue. The approved measures to accelerate retirement of long-serving government employees and consultants and to reduce the pay scale for new joiners have the potential to generate fiscal savings, but only over longer term.

However, these adjustment measures are unlikely to be sufficient to prevent a significant erosion of Oman's debt and debt affordability metrics. In Moody's baseline scenario, which incorporates the 10% spending cut and the VAT implementation as well as some additional measures that the government is likely to implement over the next couple of years, Oman's fiscal deficit (excluding privatization proceeds) will widen to more than 19% of GDP in 2020 from 7.6% of GDP in 2019 and around 14% of GDP expected previously. In 2021, Moody's expects a deficit of around 15% of GDP.

Reflecting the large fiscal deterioration, Moody's now expects Oman's government debt to increase sharply to around 86% of GDP in 2021 from 59% of GDP in 2019. Government debt may stabilize around these levels thereafter, but is unlikely to fall significantly. This increase assumes net financing from the government's liquid fiscal reserves equivalent to around 1.5% of GDP in 2020 and 3.5% of GDP in 2021, and the use of some additional internal sources of funding available to the government this year. In tandem with the rising debt burden, government debt affordability will deteriorate as well with government interest payments likely exceeding 13% of revenue in 2021 -- more than double of the 2019 level.

Oil prices recovering faster than Moody's currently expects could help stabilize Oman's debt and debt affordability metrics at a stronger level, although there is a risk that favorable oil price developments would lead to weaker implementation of the planned fiscal consolidation measures, as was the case in 2018.

AVAILABLE GOVERNMENT ASSETS SUPPORT Ba3 RATING

Notwithstanding the large increase in debt and interest payments that Moody's now expects in the next few years, Oman's Ba3 rating remains supported by the availability of government assets which have the potential to slow debt accumulation. These assets include the stock of liquid fiscal reserves, equivalent to around 23% of GDP, which are held in the State General Reserve Fund (recently merged into the Oman Investment Authority, OIA) and the Petroleum Reserve Fund (held at the Central Bank of Oman). Moody's estimates that these assets would be sufficient to cover the government's funding gap at least until mid-2021 under an adverse scenario where external borrowing remains inaccessible at sustainable rates and maturities.

Government assets that could slow the pace of debt accumulation also include stakes in oil and non-oil sector entities that the government could monetize, pending stabilization of the global financial and economic conditions. During 2018-19 the government showed willingness and ability to monetize such assets, reducing its overall borrowing requirement.

RATIONALE FOR THE NEGATIVE OUTLOOK

NEGATIVE OUTLOOK CAPTURES MATERIAL GOVERNMENT LIQUIDITY AND EXTERNAL VULNERABILITY RISKS

Moody's expects that Oman's government gross financing needs will increase to nearly 25% of GDP (including the rollover of T-bills equivalent to about 1.2% of GDP) in 2020, up from 9.6% of GDP in 2019 and around 20% of GDP expected for 2020 previously. Over the past four years, external borrowing covered on average around 80% of the government's gross annual financing needs, indicating high degree of vulnerability to shifts in foreign investor sentiment and global financial markets conditions, such as those that were triggered by the current combined coronavirus and oil price shock. Oman's external borrowing costs have increased significantly as implied by the widening of the secondary market sovereign bonds spreads by more than 250 basis points since the start of 2020.

Moody's also expects a significant widening of Oman's current account deficit to more than 20% of GDP in 2020 from an estimated 7.2% of GDP in 2019 and 12% of GDP expected in March. Over the past four years, Oman's large current account deficits were financed mostly by the government's external borrowing or (to a lesser extent) foreign direct investment inflows related to the monetization of government assets, including the stake in the BP-Khazzan gas project. Should similar financing not be forthcoming now, the current account deficit would lead to large and larger than expected drawdowns from central bank foreign currency reserves or the foreign currency assets held by OIA. Erosion of these external buffers would reduce Oman's resilience to further external shocks and could pressure its exchange rate peg.

The negative outlook on Oman's Ba3 rating also reflects implementation risks associated with the planned fiscal adjustment under the National Program for Fiscal Balance (Tawazun). The limited track record in implementing significant fiscal tightening measures, especially in a weak growth environment, points to continuing downside risks of even greater financing requirements and a faster depletion of buffers, which could exacerbate the liquidity and external pressure mentioned above.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

As an oil exporter, Oman's environmental risks derive from carbon transition. Oman's credit profile would face downward pressure in a scenario of rapid global transition to lower reliance on hydrocarbons that would depress global hydrocarbon demand and prices. However, in light of the measures against climate change taken so far, this is not Moody's baseline.

Social risks currently have a moderate impact on Oman's credit profile. Oman is vulnerable to social pressure that would arise from expenditure cuts and tax increases as part of fiscal consolidation efforts by the government. Prioritization of social goals has contributed to slow fiscal policy response to structurally lower oil prices since 2014. Exposure is mitigated by high income levels and the government's financial buffers, although the latter are diminishing. Moody's regards the coronavirus pandemic as a social risk under its ESG framework, given the substantial implications for public health and safety. For Oman, the main impact of the global shock is depressed oil revenue in the short and medium term, significantly affecting the sovereign's fiscal and debt metrics.

Governance considerations are material for Oman's credit profile. Governance considerations include relatively weak public finance management and controls, which have contributed to the slow adjustment to lower oil prices since 2014, leaving Oman highly exposed to further and more durable external shocks. They also relate to the limited scope and lack of timeliness in the publication of financial and economic data. Absence of reliable key statistics, such as quarterly real GDP, typically weakens policy effectiveness and reduces the agility of policy responses to shocks.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The negative outlook indicates that an upgrade is unlikely in the near term. Moody's would likely stabilize the outlook if prospects of significantly narrower fiscal and current account deficits in the next few years pointed to slower government debt accumulation and/or a smaller erosion of fiscal and foreign currency buffers than Moody's currently expects, easing government liquidity and external risks. Such fiscal and current account improvement would likely result from more significant progress on the implementation of fiscal consolidation measures than Moody's currently expects, and could be supported by a faster recovery in oil prices than Moody's currently assumes. The stabilization of the outlook would be also supported by evidence of the government's capacity to durably access external financing at sustainable rates and long maturities.

Moody's would likely downgrade the rating if further delays in implementing fiscal adjustment pointed to an increased likelihood that government debt rises even further and for longer than Moody's currently projects. In turn, a higher debt burden over a prolonged period of time would further increase government liquidity and external vulnerability risks, including the risks around the sustainability of the currency peg. Durably and materially lower oil prices than Moody's currently assumes that widen the government's borrowing needs and/or accelerate the decline in the government's financial buffers would also likely lead to a downgrade.

GDP per capita (PPP basis, US$): 47,366 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.4% (2019 Estimate) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -0.2% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -7.8% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -7.2% (2019 Actual) (also known as External Balance)

External debt/GDP: 91.1% (2019 Estimate)

Economic resiliency: baa3

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 18 June 2020, a rating committee was called to discuss the rating of the Oman, Government of. The main points raised during the discussion were: The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

The local market analyst for this rating is Alexander Perjessy , +971 (423) 795-48.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

David Rogovic
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Marie Diron
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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