Moody’s downgrades Oman for a second time in 2020 as oil dips

This year, Oman trimmed its budget expenditure and announced liquidity support in an effort to provide some relief from the Covid-19 shock

Oman Muscat

Oman’s sovereign rating was cut for a second time this year by Moody’s Investors Service as a lower crude price environment will likely slash the Gulf nation’s oil revenue.

The rating company downgraded the sovereign a notch lower to Ba3 – three levels into its non-investment grade scale, and changed its outlook to negative, according to a statement on Tuesday.

In March, Moody’s put Oman on review for the downgrade, saying the country’s low fiscal strength will likely place pressure on its finances. Its assessment is now on par with S&P Global Ratings and one level below that of Fitch Ratings.

“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,” according to the statement.

Moody’s has revised its Brent crude price assumptions for 2020 and 2021 to an average of $35 per barrel and $45 respectively.

The biggest Arab oil exporter outside OPEC, Oman was considered to be one of the most vulnerable economies in the six-nation Gulf Cooperation Council even before the dual crisis. At the same time, its long-standing neutrality on regional and international issues have given it a special identity.

This year, Oman trimmed its budget expenditure and announced liquidity support in an effort to provide some relief from the Covid-19 shock. It has also discussed the possibility of financial aid from wealthier neighbors, people with knowledge of the matter told Bloomberg.

The Gulf sovereign still has access to a relatively robust stock of liquid fiscal and foreign currency reserves, according to Moody’s; and, its scope to slow the pace of balance sheet deterioration can be done through spending and revenue measures as well as willingness from neighboring countries to extend support.

More from Moody’s:

  • 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.
  • Oman’s government revenue derived from oil and gas will decline by more than 12 per cent of gross domestic product in 2020.
  • The fiscal deficit – excluding privatisation proceeds, will widen to more than 19 per cent of GDP this year from 7.6 per cent of GDP in 2019 and around 14 per cent of GDP expected previously, according to Moody’s estimates. Next year, the deficit is expected at around 15 per cent of GDP.
  • Government debt likely to increase to around 86 per cent of GDP in 2021 from 59 per cent of GDP in 2019. “This increase assumes net financing from the government’s liquid fiscal reserves equivalent to around 1.5 per cent of GDP in 2020.”
  • Government gross financing needs will increase to nearly 25 per cent of GDP in 2020, up from 9.6 per cent of GDP last year.
  • Current account deficit seen widening to more than 20 per cent of GDP this year from an estimated 7.2 per cent of GDP in 2019.