Standard & Poor’s Ratings Services has affirmed its ‘BBB/A-3’ foreign currency and ‘BBB+/A-2’ local currency issuer credit ratings on the Sultanate of Oman. The affirmation reflects continued fiscal prudence and a strong net asset position, despite enduring structural weaknesses. The outlook is stable.
“The government benefits from a strong net asset position, projected by Standard & Poor’s at 22% of GDP at year-end 2003, and expected to be maintained at more than 22% in 2004,” says Standard & Poor’s credit analyst Luc Marchand. “This ensures the government’s capacity to absorb potential fluctuations in oil prices.”
The government’s 2003 budget bases oil revenues on a conservative level of oil production and an average price of US$20 per barrel. In Standard & Poor’s opinion, the average oil price in 2003 is likely to be higher than budgeted, with the ensuing excess oil revenues being transferred to the State General Reserve Fund (SGRF). Assuming average oil prices for Omani crude of US$28.4 for 2003, the consolidated budget balance (budget and extra-budgetary funds) could register surpluses of 3.8% of GDP.
The ratings on Oman are also supported by a long track record of monetary and exchange rate stability, and adequate external liquidity.
Nevertheless, the ratings are constrained by weaknesses in Oman’s economic structure and institutions. Economic growth depends heavily on oil production and prices, and the non-hydrocarbon private sector, which remains relatively small, is highly dependent on government expenditure for its growth. As a result, the government balance should return to a deficit in 2004-05, as oil production and prices are expected to decrease. However, these deficits should remain well under 3% of GDP, assuming an oil price decrease to about US$24.6 per barrel (Brent) in 2005. In addition, the slow pace of structural reforms and institution-building, along with labour market rigidities, hinder the development of a private sector that would be able to absorb the growing number of Omani job-seekers.
Oman has enjoyed political stability for at least a generation, but it has not yet experienced a smooth change in leadership or a change of government. Although future governments are likely to continue with the current prudent policies, this has not been tested.
The stable outlook is based on the expectation that fiscal prudence will remain sufficient to address the challenges posed by Oman’s development needs and vulnerability to oil production and prices.
Looking ahead, Marchand adds: “The ratings could be raised if the government strengthened its net asset position, increased its domestic tax revenue base significantly, accelerated privatization, or made more progress in developing a competitive private sector. Progress in expanding non-oil exports or attracting more foreign direct investment in the non-energy sectors would also support an upgrade. Conversely, the ratings could come under downward pressure if the government relaxed fiscal discipline or the banking system came under stress.”