Muscat: Capital Intelligence Ratings (CI Ratings) has upgraded Oman's Long-Term Foreign Currency Rating (LT FCR) and Long-Term Local Currency Rating (LT LCR) from 'BB' to 'BB+' on Friday. Additionally, CI Ratings has affirmed the sovereign's Short-Term FCR (ST FCR) and ST LCR at 'B', while revising the Outlook for the ratings to Stable from Positive.
According to CI Ratings, the upgrade is a result of the continuous decline in gross central government debt and the expectation that fiscal and external balances will remain in surplus in 2024-2025. This positive outlook is attributed to favorable hydrocarbon prices and sustained reform momentum.
The statement further highlights the support provided by prudent fiscal and debt management policies, aimed at reducing the budget's vulnerability to oil price fluctuations and significantly lowering central government debt through the repayment, prepayment, and buyback of expensive external debt using recent hydrocarbon windfalls.
Oman's commitment to structural reforms outlined in Oman Vision 2040, the soundness of the banking system, and the expectation of financial support from other GCC countries in times of need also contribute to the ratings' strength, as stated by the international rating agency.
In 2023, the government budget remained robust, with a surplus of 5.2 percent of the gross domestic product (GDP), compared to 7.2 percent in 2022. This positive outcome can be attributed to favorable hydrocarbon prices and continued fiscal consolidation measures, including spending rationalization and reduced subsidies for food and energy. Furthermore, central government debt decreased to 36.8 percent of GDP by the end of 2023, down from 42.6 percent at the end of 2022.
The decline in the debt repayment, amounting to 4.8 percent of GDP, was the main reason for the decrease. This was achieved through the buyback of eurobonds and sukuk, as well as the prepayment of syndicated loans equivalent to OMR1.8 billion in the second half of 2023. As a result, the external government debt has improved its structure, although a majority of it is still in foreign currency and held by non-residents. This has also helped alleviate some of the pressure on the interest bill caused by tighter local and international monetary policies, according to the rating agency.
The rating agency stated that the interest expense has decreased to 5.9 percent of total revenues in 2023, down from 6.7 percent in the previous year. It is expected to remain at around 6 percent for the next two years.
Government contingent liabilities, which arise from State-Owned Enterprise (SOE) debt, continue to pose a potential fiscal risk, although it is declining. The reorganization of non-hydrocarbon SOEs under the Oman Investment Authority (OIA) and hydrocarbon SOEs under Energy Development Oman (EDO) has led to deleveraging, resulting in a decrease in debt to approximately 26 percent of GDP in 2023, compared to 29 percent in 2022. Around a quarter of this debt is directly guaranteed by the Omani government.
Looking ahead, CI's baseline scenario assumes that hydrocarbon prices will remain high, averaging $77.5 per barrel throughout 2024-25, surpassing the budget's average fiscal breakeven oil price of $70 per barrel. CI Ratings stated, "We anticipate that the central government budget surplus will average 3.1 percent of GDP during the forecast period, and central government debt will further decline to 33.2 percent of GDP by the end of 2024, which is lower than our previous projection of 35.9 percent."
Oman's credit ratings are still being supported by the government's commitment to implementing structural reforms that aim to diversify the economy, strengthen public finances, and increase private sector involvement while safeguarding vulnerable groups. The government has passed several new laws in 2023, including the labor law and social protection law, which led to the establishment of Oman's Social Protection Fund. This year, the government is expected to continue its efforts to gradually reduce the state's presence in the economy through its divestment program, according to the rating agency.
Furthermore, external strength is improving, as Oman's current account position remains in a significant surplus of 5.1 percent of GDP in 2023 (compared to 6.4 percent in 2022). This positive trend is projected to continue, with the current account expected to maintain surpluses averaging 4.3 percent of GDP in 2024-25. The central bank's official foreign currency reserves, excluding the external liquid assets of the OIA, remained stable at $17.5 billion in October 2023. Debt repayments and prepayments have prevented further accumulation of foreign assets. The rating agency also noted that reserve adequacy is high, with official reserves covering approximately 261 percent of external debt due in 2024 and 37.8 percent of broad money (M2). Additionally, the agency believes that external liquidity risks are mitigated by the likelihood of Oman receiving financial assistance from wealthier GCC countries if necessary.
Economic growth in 2023 was tempered due to voluntary cuts in hydrocarbon production. The real GDP is estimated to have grown by approximately 2.1 percent in 2023, with projections indicating an average increase of 2.4 percent in 2024-25. Oman's growth prospects are bolstered by external demand for oil, manufacturing goods like plastics, chemicals, and base metals. Additionally, the economy is set to benefit from significant FDI in the hydrocarbon sector and infrastructure projects in non-hydrocarbon industries.
The Omani banking sector's strong financial position, supported by healthy capital buffers and a relatively low level of non-performing loans, contributes positively to the country's ratings. Furthermore, the decreasing reliance on cross-border funding is evident, with foreign liabilities representing 11.4 percent of total liabilities in October 2023 (down from 12.5 percent in December 2022).
