NOTE: On April 01, 2020, the press release was corrected as follows: In the first sentence of the first paragraph of the Press Release, the referenced ratings were changed to “issuer and senior unsecured ratings.” Revised Release follows.
New York, March 30, 2020 -- Moody's Investors Service, ("Moody's") has
today placed the Ba2 issuer and senior unsecured ratings of the Government of Oman under review
The decision to place the rating under review for downgrade reflects Oman's
increased external vulnerability and government liquidity risks following
the large oil price shock and the severe tightening in external financing
conditions compared with a few weeks ago when Moody's downgraded
Oman's ratings to Ba2 with a stable outlook. Moody's
judgment regarding effective governance was one of the drivers of this
action. The severity of the external shock experienced by Oman
is amplified by its relatively weak institutional and governance strength
which, over the past four years, have impeded fiscal and economic
adjustment to lower oil prices, leaving the sovereign exposed to
further and more durable shocks.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. Oman is highly exposed
to the loss in government revenue due to the decline in oil prices and
increase in financing costs that result from financial market dislocation.
The review period, which may extend beyond the usual three-month
horizon, will allow Moody's to take stock of Oman's
financing needs and options, including an assessment of progress
on the implementation of the government's fiscal adjustment program,
and the implications for the government's debt and assets,
and the economy's external stability.
Moody's has also placed the government of Oman's (P)Ba2 senior
unsecured medium-term note program rating on review for downgrade.
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 Ba2 backed senior unsecured rating
and the (P)Ba2 backed senior unsecured medium-term note program
rating were both placed on review for downgrade.
Oman's long-term local- and foreign-currency
bond ceilings and its long-term local currency deposit ceilings
are unchanged at Baa3. Oman's long-term foreign currency
deposit ceilings are unchanged at Ba3. Its short-term foreign-currency
bond and deposit ceiling are unchanged at Prime-3 and Not Prime,
RATIONALE FOR INITIATING THE REVIEW FOR DOWNGRADE
A SHARP OIL PRICE SHOCK TO WIDEN FISCAL AND CURRENT ACCOUNT DEFICITS
The review period will allow Moody's to assess the implications
of the sharp oil price shock and significant financial market turmoil
on Oman's financing needs and sources. This will include
an assessment of the government's capacity to prevent a significant
widening in the budget deficit to large levels, and the implications
for the economy's external stability.
Due to depressed global oil demand arising from the coronavirus outbreak
alongside a sharp increase in the supply of crude oil as the OPEC+
talks failed, Moody's has revised down its oil price assumptions
for 2020 and 2021 to an average of $43/barrel and $53 respectively,
about $20 and $10 below the assumptions held a few weeks
ago when Moody's downgraded Oman's rating to Ba2 with a stable
outlook. In the medium-term, Moody's expects
oil prices to return to a medium-term range of $50-70/barrel.
The risks to these projections are skewed to the downside.
Based on these oil price assumptions, Moody's now expects
Oman's fiscal deficit to widen to nearly 14% of GDP in 2020
from 7.7% of GDP in 2019, while the current account
deficit will increase to 12% of GDP in 2020 from 7.2%
of GDP in 2019.
These baseline projections take into account Moody's expectation
that over the next 6-12 months the government will strengthen and
accelerate the implementation of its planned medium-term fiscal
adjustment plan under the National Program for Fiscal Balance (Tawazun)
to offset some of the hydrocarbon revenue loss.
The government has so far announced a 5% cut to approved budgets
for civil, military and security agencies, equivalent to around
1.6% of GDP, as well as spending cuts for state-owned
enterprises. Moody's expects further spending cuts,
assumes a small increase in oil production and higher dividends from state-owned
enterprises, which will both contribute to reducing the decline
in fiscal revenues resulting from lower oil and gas prices.
The government's reduced spending targets will be supported by a
range of public finance management reforms, which are currently
under implementation and include a rollout of the Government Financial
Management Information System to support budget preparation, execution,
and financial reporting and the activation of a Treasury Single Account
to improve spending controls by consolidating all inflows and outflows
of government funds, which are currently spread across the banking
system. The fiscal adjustment program also includes government
asset sales, although at least some of those are likely to be delayed
in current market conditions.
The review period will allow Moody's to assess the outlook for oil
prices and the extent of the government policy response to limit fiscal
WIDER FINANCING NEEDS TO LOWER OMAN'S FINANCIAL ASSETS, WEAKENING
FUTURE RESILIENCE TO SHOCKS
Moody's now expects that the government's financing needs
in both 2020 and 2021 will rise to around 20% of GDP (including
short-term domestic debt). In the past two weeks,
Oman's sovereign bond spreads have widened above 800 basis points
from less than 400 in the first two months of the year, making external
financing prohibitively expensive at least in the near term. Assuming
that the financial market dislocation persists for several more months,
Moody's expects that the government will significantly rely on its
still relatively large fiscal and foreign currency buffers to finance
its fiscal and current account deficits.
Moody's estimates that the government's liquid fiscal reserves,
including liquid assets accumulated in the State General Reserve Fund
(SGRF) and the Petroleum Reserve Fund (PRF), stood at around $18
billion or 23% of GDP at the end of 2019. These mostly foreign-currency
denominated assets will also support financing of Oman's current
account deficit and the peg, in addition to the support provided
by a relatively robust stock of central bank foreign currency reserves,
which stood at $16.4 billion (including $2.9
billion managed on behalf of PRF) at the end of 2019, covering more
than six months of expected imports of goods and services.
While reducing the rate of government debt accumulation, significant
drawdowns from sovereign fiscal and foreign currency reserves will reduce
Oman's resilience to further shocks, including possibly lower
oil prices for longer than Moody's currently assumes and/or a prolonged
period of financial markets turmoil.
Furthermore, lower fiscal and foreign currency buffers will expose
the sovereign to increasing pressure on the peg of the Omani rial to the
dollar, compounding government liquidity and external vulnerability
risks, which will rise in 2021-22 when the government's
scheduled external debt repayments increase sharply to $4.3
billion (6% of GDP) and $6.4 billion (8% of
GDP), respectively, from $1.2 billion (1.7%
of GDP) in 2020 and $315 million in 2019.
The review period will allow for a more accurate assessment of Oman's
financing options and the implications of reliance on various funding
sources for its credit profile over the medium term.
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 the structural oil price shock since 2014.
Exposure is mitigated by high income levels and the government's
financial buffers, although the latter are diminishing.
Governance considerations are material for Oman's credit profile
and Moody's assessment of governance and institutional strength
informed today's action. 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 key statistics,
such as quarterly real GDP, typically weakens policy effectiveness
and reduces the agility of policy responses to shocks.
WHAT COULD CHANGE THE RATING DOWN
Moody's would likely downgrade the rating if the review were to
conclude that 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 raise liquidity
and external risks. Durably and materially lower oil prices than
Moody's assumes that widen the government's financing needs
and/or accelerate the decline in financial assets would also likely lead
to a downgrade.
WHAT COULD LEAD TO CONFIRMATION OF THE RATING AT THE CURRENT LEVEL
Moody's would likely confirm the rating at the current Ba2 level if the
review were to conclude that prospects of significantly narrower fiscal
and current account deficits in the next two years would lead to a lower
government debt burden than the agency currently expects and ease liquidity
and external risks.
GDP per capita (PPP basis, US$): 47,933 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.8% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.8%
Gen. Gov. Financial Balance/GDP: -7.9%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -5.5% (2018 Actual)
(also known as External Balance)
External debt/GDP: 80.6% (2018 Estimate)
Economic resiliency: baa3
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 25 March 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 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 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.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653