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Rating Action:

Moody's downgrades Oman's rating to Baa3, outlook negative

16 Mar 2018

Frankfurt am Main, March 16, 2018 -- Moody's Investors Service ("Moody's") has today downgraded the long-term issuer and senior unsecured bond ratings of the Government of Oman to Baa3 from Baa2. The outlook remains negative.

The key driver of the downgrade is Moody's expectation that Oman's fiscal and external metrics will continue to weaken, in part reflecting institutional and policy constraints. Moreover, subdued growth over the next few years will weaken economic resiliency.

The negative outlook reflects Moody's view that, despite a number of credit strengths, the balance of risks to the Baa3 rating is skewed to the downside. In the absence of significant measures to narrow the fiscal and current account deficits beyond the current plans, Oman's capacity to absorb potential shocks would erode further.

In a related action, Moody's has downgraded the Government of Oman's senior unsecured medium-term note program rating to (P)Baa3 from (P)Baa2. Today's rating action also applies to Oman Sovereign Sukuk S.A.O.C, for which the backed and senior unsecured ratings were downgraded to Baa3 from Baa2 and the senior unsecured medium-term note program was downgraded to (P)Baa3 from (P)Baa2.

Moody's has today also lowered Oman's long-term foreign-currency bond ceiling to Baa2 from Baa1 and its long-term foreign-currency deposit ceiling to Baa3 from Baa2. At the same time, the short-term foreign-currency deposit ceiling was lowered to Prime-3 from Prime-2, while the short-term foreign-currency bond ceiling is unchanged at Prime-2. Oman's long-term local-currency bond and deposit ceilings were lowered to Baa2 from Baa1.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO Baa3

PERSISTENT WEAKENING IN FISCAL AND EXTERNAL METRICS PARTLY DENOTES INSTITUTIONAL AND POLICY CONSTRAINTS

The persistent weakening in fiscal and external metrics partly reflects institutional and policy constraints to a faster adjustment to lower oil prices. These developments are consistent with a lower rating at Baa3.

Moody's forecasts that over the next five years Oman's fiscal deficit will remain large, around 5-7% of GDP. With persistent sizeable deficits, Moody's projects that the government debt burden will rise in the coming years, surpassing 50% of GDP by 2019 and rising above 60% by 2021, from 40.5% in 2017. As a result, debt affordability will weaken with interest payments absorbing 8.4% of government revenues by 2019 from an estimated 3.8% in 2017.

The government's planned expenditure cuts and additional revenue-raising measures will only narrow the deficit to a limited extent. Oman's very large public sector wage bill at 12% of GDP and 27% of total expenditure and the large increases in social spending that have contributed to domestic political stability over the past seven years pose significant policy hurdles to faster fiscal consolidation. While the government aims to keep the civil servants' wages and benefits bill broadly unchanged in nominal terms over the next few years, Moody's does not foresee a significant nominal reduction of non-interest government spending over the medium term.

Combined with a revenue base still concentrated in hydrocarbon activities (around 70% of total revenue), this means that Oman's fiscal breakeven oil price of more than $80 per barrel -- the oil price which would balance the government's budget -, will remain well above actual oil prices. Moody's assumes that oil prices will fluctuate between $45 and $65 per barrel over the medium term.

Under a broadly unchanged tax structure, there is limited scope for the authorities to raise revenues. The introduction of a value added tax (VAT), which was originally planned for early 2018 -- in coordination with the rest of the GCC countries -- has been postponed to 2019. The government expects that the VAT, together with new excise taxes on tobacco, alcohol, pork and sugary beverages, will increase the revenue by up to OMR400 million (or about 1.3% of our forecast 2018 nominal GDP) if and when fully implemented over the next several years. This compares to our estimate of the 2017 fiscal deficit of 11.4% of GDP.

A relatively large stock of government financial assets (54% of GDP at the end of 2017) and the structure of the government's debt partly mitigate the weakening in fiscal metrics and continue to support the rating at Baa3. The Government of Oman started issuing debt in the international capital markets in 2016, and the average original maturity of issuance to date is close to 15 years. As a result, the government's debt repayments remain manageable, at less than 5% of GDP per year during 2018-2020, before rising to 5.8% and 7.3% of GDP in 2022 and 2023, respectively. These relatively low -- although rising -- repayments mitigate the impact of large fiscal deficits on the government's total gross borrowing requirement (equivalent to 12.9% of GDP in 2017).

Moreover, Oman's current account deficit will remain wide, at around 9% of GDP in the next few years. Already, three consecutive years of large current account deficits have reduced Oman's net external asset position to less than 10% of GDP in 2017 from 55% of GDP in 2014 -- eroding one of Oman's important credit support. Moody's forecasts that, in the absence of new policy measures that could restrain Oman's imports, the country's net external asset position will be negative by the end of 2019.

Over the past three years, the current account deficits have been almost exclusively financed by the government's external borrowing. Moody's assumes that the government will maintain its access to external financing which will keep Oman's relatively large stock of official external liquid asset, including the central bank reserves, around current levels. In turn, the presence of sizeable, and in part liquid, reserves will continue to support the country's long-term exchange rate peg to the US dollar.

SUBDUED GROWTH IN THE NEAR TO MEDIUM TERM UNDERMINES ECONOMIC RESILIENCY

Real GDP growth will remain relatively subdued in the near to medium term and close to a full percentage point below the population growth excluding expatriates. This will undermine the ability of the economy to absorb potential shocks.

Three main factors will constrain GDP growth. First, while the cuts in oil production as part of the OPEC+ agreement will likely reverse next year, Moody's expects that beyond 2019 oil production will be broadly stable at close to 1,000 thousand barrels per day. At the current juncture, this level of production is a sustainable rate of production for the next 10-15 years, given existing oil extraction methods and the current size of Oman's proven oil reserves. Moody's expects that any new oil discoveries would be used to support additional years of sustainable production rather than lead to significant oil production increases.

Second, the new BP Khazzan field will boost Oman's total gas production capacity by more than a third but, in the nearer term, the expansion of the country's natural gas production will be constrained by limited domestic demand, at least until the new industrial projects in the Duqm Special Economic Zone start coming online from 2020. Oman's ability to significantly increase its exports of gas in the near term is limited by the capacity of its existing LNG facilities.

Third, growth in the non-hydrocarbon sector will be constrained by the government's efforts to rationalize spending. In the past two decades, non-hydrocarbon real GDP growth in Oman has been strongly correlated with an annual growth in the government's nominal expenditure which Moody's expects to broadly stagnate.

Longer term, growth may strengthen depending on the effectiveness of a range of economic diversification projects, most of which are at a very early stage.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects our view that the risks to Oman's fiscal strength arising from limited policy adjustment flexibility are tilted to the downside. In particular, with no additional fiscal consolidation measures beyond the current announcements, Oman's government debt would rise above 60% of GDP in the next 3-4 years.

In this scenario, foreign investors' willingness to finance Oman's large current account deficits at relatively low costs could weaken, exacerbating the sovereign's external vulnerability.

WHAT COULD MOVE THE RATING UP/DOWN

The negative outlook indicates that an upgrade is unlikely in the near term. The formulation of clear policy measures that would durably reduce Oman's fiscal and external imbalances and demonstrate improving capacity by policymakers to combine objectives of social stability with fiscal consolidation would be credit positive.

Downward pressure on the rating could stem from signs that the government is not able to implement the planned fiscal consolidation measures and/or no announcement of new substantive measures that would point to a further weakening in fiscal strength. Downward pressure could also develop if the government's ability to access long-term international financing weakened. This could be reflected in issuance at significantly shorter maturities. A material erosion of the central bank's foreign exchange reserves would also be credit negative.

GDP per capita (PPP basis, US$): 46,067 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3.0% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.1% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -17.5% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -18.4% (2016 Actual) (also known as External Balance)

External debt/GDP: 55.6% (2016 Estimate)

Level of economic development: Moderate level of economic resilience

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

On 12 March 2018, 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 economic fundamentals, including its economic strength, have materially decreased. The issuer's institutional strength/framework, has materially decreased. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. 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 these ratings is Alexander Perjessy, +971 (423) 795-48.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

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

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.

Steffen Dyck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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