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Abu Dhabi, UAEMonday 17 December 2018

Moody's cuts Oman's rating on fiscal deficit, subdued economic growth

Impact of economic restructuring efforts likely to be minimal, agency says

Moody's Investors Service downgraded Oman's rating by a notch to Baa3. Chris Jackson / Getty Images
Moody's Investors Service downgraded Oman's rating by a notch to Baa3. Chris Jackson / Getty Images

Moody's Investors Service downgraded the long-term issuer and senior unsecured bond ratings of the Oman government by a notch to Baa3, citing larger fiscal deficits and the ongoing weakening of its economy on the back of subdued growth in the coming years.

“The key driver of the downgrade is Moody's expectation that Oman's fiscal and external metrics will continue to weaken, in part reflecting institutional and policy constraints,” Moody’s said in a statement on Saturday. “In the absence of significant measures to narrow the fiscal and current account deficits beyond the current plans, Oman's capacity to absorb potential shocks would erode further.”

Moody's forecasts Oman’s fiscal deficit will remain at 5-7 per cent of GDP in the next five years. The agency projects the government’s debt burden will exceed 50 per cent of GDP by 2019 and rise above 60 per cent by 2021, up from 40.5 per cent at end-2017. The affordability of government debt will also weaken, with interest payments absorbing 8.4 per cent of government revenues by 2019 compared with around 3.8 per cent in 2017.

The Omani government, which sold $5 billion worth of bonds 12 months ago, tapped the debt markets again in January via a $6.5bn bond, its largest ever. Oman, the biggest Middle Eastern oil producer outside Opec, is trying to diversify its economy and cut its dependence on oil revenues. However the Arabian Gulf state doesn’t have access to the large cash buffers enjoyed by some of its GCC peers, and therefore has to rely more heavily on capital markets to plug fiscal deficits.

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The government earlier this year said it plans to finance 84 per cent of its 2018 fiscal deficit - or 2.5bn Omani rials ($6.5bn) - via domestic and foreign borrowings, with remaining 500m rial deficit being serviced via drawdowns of reserves.

Oil proceeds make up about 70 per cent of the Oman’s revenue. The decline in oil prices has forced Muscat to cut spending and privatise some state assets. The government, which announced an expansionary budget earlier this year, plans to sell stakes in the at least six state-owned entities to raise additional finances.

But planned expenditure cuts and additional revenue-raising measures will only narrow the deficit to a limited extent, according to Moody’s. Oman's large public sector wage bill – which accounts for 12 per cent of GDP and 27 per cent of total expenditure – together with increases in social spending over the past seven years, pose significant policy hurdles to faster fiscal consolidation.

“While the government aims to keep the civil servants' wages and benefits bill broadly unchanged in nominal terms over the next few years, Moody's does not foresee a significant nominal reduction of non-interest government spending over the medium term,” the agency noted.

Real GDP expansion will remain subdued in the coming years, with growth in the non-hydrocarbon sector constrained by the government's efforts to rationalise spending, Moody’s predicted.

The sultanate in January said it expects GDP to expand by at least 3 per cent this year, supported by the recovery in oil prices and its diversification drive. Oman’s growth forecast is in line with that of the IMF, which estimates its GDP will grow by 3.1 per cent in 2018, compared with 2.5 per cent in 2017.