Moody’s Investors Service downgraded Oman’s credit rating to junk with a negative outlook due to concerns over the sultanate's ability to contain its public finances in a low oil price environment.
The agency lowered the country's long-term issuer and senior unsecured bond rating from Baa3 to Ba1, one level below investment grade, Moodys’ said on Wednesday. It also gave Oman a negative outlook, two measures that will make it more expensive for the sultanate to borrow from international markets.
“The key driver of the downgrade is Moody's expectation that the scope for fiscal consolidation will remain more significantly constrained by the government's economic and social stability objectives than it had previously assessed,” said the rating agency. “As a result, in an environment of moderate oil prices, Oman's fiscal metrics will weaken to a level that is consistent with a lower rating.”
Oman, the biggest Middle East oil producer outside Opec, is struggling to contain its finances amid the low oil price environment compared to the highs of 2014 and an increase in government spending.
For the 2019 budget, the government is increasing total spending to 12.9 billion Omani rials (Dh123.2bn) – a rise of 400m rials from the 2018 budget.
“The negative outlook reflects Moody's view that the balance of risks to the Ba1 rating is skewed to the downside,” the agency said. “In particular, foreign investors' willingness to finance Oman's large deficits at relatively low costs could weaken, exacerbating the sovereign's external vulnerability and raising government liquidity pressures.”
Last year, the International Monetary Fund urged Oman to implement structural reforms to boost private sector-led growth, increase economic diversification, create jobs, institute measures to bolster fiscal and external debt sustainability and support the exchange rate peg.
“Moody's assessment that the scope for further fiscal consolidation is very limited reflects the challenges faced by the government in introducing new non-oil revenue measures and controlling expenditure, especially in a weak growth environment, given its social stability objectives and the overarching desire to preserve the current level of living standards of the Omani citizens," the agency said.
Moody’s is projecting a widening of the fiscal deficit and ballooning of public debt if current low oil levels persist and the government stalls in implementing fiscal reforms. It is forecasting the fiscal deficit will deteriorate to range between 7 to 11 per cent of GDP in the next three years.
“Overall, in Moody's baseline scenario which assumes the excise tax and VAT implementation by early 2020 in addition to some additional state asset sales over the next three years, Oman's debt metrics will continue to deteriorate in the medium term, reaching around 60 per cent of GDP and more than 170 per cent of revenues by 2021,” the agency said.
At present Lebanon has the world's third highest debt to GDP ratio at 150 per cent, according to the IMF.
