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Moodys: Oman's government bonds are rated A2

- Maha Karim

Sunday, 07 June 2009 20:02

Moody's Investors Service rated Oman's foreign and local currency government bonds A2. These investment grade ratings are supported by the country's high level of economic strength. Oman's GDP per capita approximated $24,000 in 2008 in PPP terms, a similar level to the Czech Republic (A1) or Malta (A1), although still considerably below that of some other hydrocarbon exporters in the region such as Qatar or the United Arab Emirates.

Oman is ranked well on various surveys of institutional strength and the government's economic policies are generally sound. Importantly, the government of Oman, like others in the GCC, has always displayed a strong willingness to repay and has a substantial net asset position. Previously wide fiscal and external current account surpluses have enabled the accumulation of foreign assets by both the public and private sectors and the country's external debt remains low.

Oman's rating is bolstered by its stable domestic political environment. Oman enjoys generally strong relations with neighbouring states, the US, and other G8 countries. Meanwhile, economic and financial event risk are mitigated by the country's strong international investment position.
Oman's rating is constrained by a number of factors, which include a heavy economic reliance on hydrocarbon exports that generate the bulk of fiscal revenue and external current account receipts. Oil prices have fallen below Oman's fiscal breakeven point and Moody's Investors Service is projecting a sizeable fiscal deficit this year.
Moody's Investors Service nevertheless considers Oman's government financial strength to be high given the government's large stock of offshore financial assets that can be tapped to fund deficits at least over the short to medium term. Moody's Investors Service will monitor the government's use of its assets carefully given that they form the main pillar of our ratings. It is encouraging that oil production volumes have recovered from their trough in 2007 but the increasing use of "enhanced oil recovery" techniques is raising the cost of producing oil.

The limited capacity of the government to absorb new job seekers and rigidities in the labour market for nationals create structural employment challenges. Finally, although Oman has historically been isolated from regional geopolitical instability, there remains a risk that a deterioration in the regional political environment could have a negative impact.

Rating Outlook
The outlook on Oman's ratings is stable. Although the fiscal outlook has worsened as oil prices have fallen,
Oman's government retains a substantial cushion of fiscal reserves with which to finance projected deficits.

What Could Change the Rating - Up
Over time, a strengthening of the public finances. An abatement of regional political tensions.

What Could Change the Rating - Down
Sustained fiscal deficits and the depletion of government assets; a significant deterioration in the regional or domestic political environment.

Recent Developments
The pace of nominal government expenditure growth slowed in 2008, to 8.9%, from over 18% in 2007. The main reason for the slowdown was a slight paring of current spending while capital outlays continued to expand strongly.

Moody's Investors Service expects the growth of government expenditure to pick back up in 2009 as the government seeks to offset the adverse effects of the global economic crisis on Oman's private sector, again focused on more productive investment expenditure. This is likely to lead to a significant budget deficit this year, although this will be easily financed by the government's extensive financial reserves.

Global Arab Network

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