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Rating Action:

Moody's places Oman's Ba2 rating under review for downgrade

30 Mar 2020

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 for downgrade.

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, respectively.

RATINGS RATIONALE

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 deterioration.

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% (2018 Actual)

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.

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.

At least one ESG consideration was material to the credit rating outcome announced and described above.

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 Risk
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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