Oman’s first S&P upgrade in over a decade may be on the cards

S&P Global Ratings could upgrade Oman’s sovereign grade for the first time since 2007 after improving its outlook to positive, following a fiscal turnaround that’s reducing the strain on its public finances.

While the sultanate’s spell in junk may be far from over, S&P’s change in the outlook from stable is a signal the firm is more inclined to raise the rating than cut it. S&P, the first of the major credit assessors to give Oman a non-investment grade, affirmed its long-term foreign currency rating at B+ on Friday, on par with Bahrain, Bolivia and Rwanda.

“Authorities have outlined a solid path to reduce the historically high fiscal deficits,” S&P credit analysts including Zahabia Gupta said in a report. “Economic and fiscal pressures on Oman are easing, as the effects of the sharp drop in oil prices in 2020 and the Covid-19 pandemic abate.”

Since Haitham bin Tariq Al Said became the new ruler of Oman last year, the country has embarked on a programme to reduce subsidies, balance the budget and levy an income tax. The government introduced a 5 per cent value-added tax in April.

The largest oil exporter outside of OPEC, Oman has struggled to cope with the coronavirus pandemic as well as lower crude prices, even raising the possibility of assistance from its neighbors. The country is also rated below investment grade by Fitch Ratings and Moody’s Investors Service.

Oman’s fiscal deficit may narrow to 4.2 per cent of gross domestic product in 2021, from 15.3 per cent in the previous year, according to S&P. The government wants to achieve budget balance by 2025.

The country’s public finances, long among the weakest in the Gulf region, remain vulnerable as Oman faces external debt maturities of $11bn over 2021-2022. S&P’s base-case scenario is for the government’s net debt to increase to 30 per cent of GDP in 2024, from about 13 per cent in 2020.

Still, S&P questioned Oman’s resolve, especially as oil prices rebound.

“The authorities may choose to slow or postpone the implementation of some of its fiscal measures if necessary, to appease public dissent,” it said. “If oil prices rise enough to ease the pressure on the government’s budget, we think execution of the fiscal consolidation plan may also weaken.”

S&P also said:

* Debt stock at government-related enterprises amounts to about 40 per cent of Oman’s GDP.
* Government’s liquid assets estimated at 50 per cent of GDP in 2021.
* Real GDP is expected to grow 1.7 per cent this year and 3.1 per cent on average in 2022-2023.
* Proceeds from the 5 per cent value-added tax seen at slightly above 1 per cent of GDP in 2021.
* Total funding needs will average about 12 per cent of annual GDP through 2024.
* Total external debt is expected to increase to 92 per cent of current-account receipts by 2024, from 37 per cent in 2019.