S&P revises Oman’s outlook to positive on progress in reforms and rise in oil prices

The sultanate is expected to narrow its fiscal deficit and slow the increase in net government debt, rating agency says

S&P expects a significant reduction in Oman’s fiscal deficit to 4.2 per cent of GDP in 2021, from 15.3 per cent in 2020. Photo: Getty Images

S&P Global Ratings revised Oman’s rating outlook to positive from stable, citing its improving fiscal position, progress on reforms and rising oil prices.

The credit rating agency also affirmed the country’s ‘B+/B’ long and short-term foreign and local currency sovereign credit ratings, it said in a statement.

“The positive outlook indicates that we consider Oman’s reform programme and the higher oil prices relative to 2020 will narrow fiscal deficits and slow the increase in net government debt over the next three years,” S&P said.

Oman's economy is expected to recover in 2021 from the dual impact of the Covid-19 pandemic and the collapse in oil prices last year. The economy is projected to grow by 2.5 per cent after a contraction of 2.8 per cent in 2020, the International Monetary Fund said last month.

The economic recovery will be led by 1.5 per cent growth in non-oil activity this year, compared with a 3.9 per cent contraction in 2020, the Washington-based fund said. Real oil gross domestic product is forecast to rebound by 3.5 per cent after shrinking by 1.7 per cent in 2020.

The sultanate has adopted various fiscal measures over the past year to support the economy during the Covid-19 pandemic, including interest-free emergency loans, tax and fee reductions and waivers, the flexibility to pay taxes in instalments and a Job Security Fund to support citizens who lost their jobs.

The fiscal deficit and government debt, which rose sharply in 2020, are projected to improve considerably over the medium term as Oman implements the Medium-Term Fiscal Balance Plan, the IMF said.

S&P estimates that Oman’s net debt will continue to increase to 30 per cent of GDP in 2024, from about 13 per cent in 2020.

The positive outlook indicates that we consider Oman’s reform programme and the higher oil prices relative to 2020 will narrow fiscal deficits and slow the increase in net government debt over the next three years

S&P Global Ratings

“Oman faces large external debt maturities of $11 billion over 2021-2022. We expect fiscal deficits and maturing debt will be funded by a mixture of external debt; asset drawdowns from the Oman Investment Authority and Petroleum Reserve Fund; and, to a smaller extent, domestic debt,” the rating agency said.

If the government fully implements its reforms programme and oil prices turn more favourable, the pace of increase in Oman’s net debt could slow significantly below S&P’s forecast of slightly above 5 per cent of GDP on average over 2021 to 2024, the agency said.

S&P also expects a significant reduction in Oman’s fiscal deficit to 4.2 per cent of GDP in 2021, from 15.3 per cent in 2020. This will be driven by higher oil prices, proceeds from value-added tax and fiscal reforms, which include revised salary scales for new government employees, lower allowances and an increase in electricity and water tariffs.

The sultanate is also planning a new personal income tax on high-wage earners that is likely to be implemented in 2023. Oman will also soon unveil an Investor Residence scheme that seeks to provide long-stay residency visas to people who invest in the country, according to local media reports that quoted the Ministry of Commerce, Industry and Investment Promotion last week.

In November last year, Oman opened up its real estate market to foreign investors further by allowing them access to a wider selection of residential properties as part of reforms aimed at improving the country’s fiscal position.

Oman’s real GDP is estimated to grow by 1.7 per cent this year and then accelerate to 3.1 per cent on average in 2022-2023 as oil and gas production ramps up after Opec+ production limits are eased, according to S&P estimates.

“Economic activity will start to pick up in 2021. However, given the ongoing oil production limits under the Opec+ agreement, Covid-19-induced lockdown measures and the slow pace of vaccinations to mid-2021, we expect only a mild economic recovery of about 1.7 per cent this year,” S&P said.

A stronger economic rebound from 2022 will be supported by higher oil and gas production and non-oil sector growth, the agency added.

Meanwhile, the government’s liquid assets, estimated to account for 50 per cent of GDP in 2021, supported Oman’s ratings, S&P said.

The rating agency said it expected countries in the GCC to provide timely support to Oman in the unexpected event of a significant deterioration in the external reserves that support the Omani rial’s peg to the US dollar.