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.
RATIONALE FOR DOWNGRADE TO Ba3
LOWER OIL PRICES INTO THE MEDIUM TERM TO SHARPLY INCREASE DEBT AND ERODE
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
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
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
RATIONALE FOR THE NEGATIVE OUTLOOK
NEGATIVE OUTLOOK CAPTURES MATERIAL GOVERNMENT LIQUIDITY AND EXTERNAL VULNERABILITY
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
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%
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.
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.
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Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
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Sovereign Risk Group
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Moody's Investors Service, Inc.
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JOURNALISTS: 1 212 553 0376
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