Moody's changes Oman outlook to positive on prospects of continued economic recovery

The outlook reflects improvements in the sultanate's debt burden and debt affordability in 2022

The Mutrah district at Mina Sultan Qaboos in downtown Muscat. Oman's economy has bounced back strongly from the pandemic driven slowdown. Silvia Razgova / The National

Moody's Investors Service has changed Oman’s outlook to positive and affirmed its Ba3 rating as higher oil prices signal a further improvement in the sultanate’s economy.

The change in outlook reflects improvements in Oman's debt burden and debt affordability metrics during 2022 and the likelihood that the trend could be sustained in the medium term, Moody’s said in a report on Friday.

“Balance sheet repair that has already taken place this year restores the fiscal space that the sovereign had lost during 2020,” Moody’s said.

The prospect that oil prices will stay elevated for the next few years, affords the government of Oman additional time to continue working on its fiscal and economic reform agenda, according to the agency.

This will increase the likelihood that Oman's “structural vulnerability to cyclical declines in oil prices and its exposure to longer-term global carbon transition risks will be reduced”, it said.

Oman’s economic recovery is gaining traction, supported by a revival of the hydrocarbon sector and the relaxation of Covid-19 restrictions, the International Monetary Fund said this week.

The economy is set to expand 4.3 per cent in 2022, supported by continued recovery of non-hydrocarbon economic activity, according to the fund.

The sultanate’s gross domestic product growth rebounded to 3 per cent last year, after a 3.2 per cent contraction in 2020.

Although Moody's expects oil prices to remain volatile and eventually decline, it estimates crude prices to remain elevated for the next two years.

A surge in oil prices since 2020 has already generated a large revenue windfall for Oman, turning its fiscal deficit of 9.6 per cent of GDP during the 2014-2021 period into a material surplus.

Based on the assumption that oil prices average $105 per barrel this year, Moody's estimates that Oman's full-year fiscal surplus will be close to 6 per cent of GDP. This will help the government boost its balance sheet.

The government has already used some of the revenue windfall, in addition to its fiscal reserves accumulated in the Petroleum Reserve Fund, to pay down outstanding debt, reducing the nominal level by $6.5 billion, which equates to 7.5 per cent of its 2021 GDP, Moody’s said.

This net debt reduction balances $4.5bn of new borrowing in 2022 to repay $9.3bn of loans and bonds maturing this year and the pre-payment of $1.7bn of debt maturing in 2023 or later, it said.

“Based on the expectation of no further net borrowing later this year, consistent with the projected fiscal surplus and no significant debt maturities, Moody's forecasts that Oman's government debt will decline to less than 45 per cent of GDP — 119 per cent of revenue — by the end of the year from 63 per cent of GDP in 2021,” the ratings agency said.

This reduction in the debt burden is below the level at the end of 2019, when it stood at 52 per cent of its GDP, “more than fully reversing Oman's loss of fiscal space sustained during 2020 and increasing the sovereign's resilience ahead of the potential next oil price shock”, Moody's said.

Oman has also increasingly focused on expanding its non-oil economic base during the past few years to cut its dependence on hydrocarbons.

The country, which recorded a budget surplus of 784 million rials ($2bn) in the first half of this year on a more than 54 per cent jump in revenue to 6.72bn rials, aims to bring in more than 9bn rials a year from tourism by 2040, according to government data released in August.

The hydrocarbon sector will account for more than 40 per cent of nominal GDP in 2022, more than 80 per cent of government revenue — equivalent to about 31 per cent of GDP — and 66 per cent of total exports of goods and services, Moody’s said.