Standard & Poor’s Ratings Services affirmed its ‘A/A-1’ long- and short-term foreign and local currency sovereign credit ratings on the Sultanate of Oman. The outlook is stable. The transfer and convertibility (T&C) assessment remains ‘AA-‘.
“The ratings are supported by Oman’s strong net external and general government asset positions and prudent investment policies. They are constrained by our view of its heavy dependence on hydrocarbons and it’s challenging demographic profile: nearly 60% of the population is under 25 (mid-2011 official estimate). It is also subject to geopolitical risk, similar to other sovereigns in the Gulf Cooperation Council. This is somewhat mitigated by the country’s strong alliances with international powers, as well as its ability to maintain a neutral and independent stance in the region,” S&P in a statement while highlighting the rationale behind the rating said.
“Policy setting and direction largely hinges on the Sultan himself. In our view, this places the effectiveness and predictability of policymaking at risk. Political institutions are at a nascent stage of development relative to no regional peers rated in the ‘A’ category. While the Sultan has taken some measures to expand political participation, the system remains highly centralized, with limited accountability of institutions. Moreover, uncertainty over succession also poses political risks, in our view.
“Oman’s economy is performing well. We expect real GDP growth to reach 5% this year, underpinned by an increase in oil production to an average of 0.94 million barrels per day (bpd) from 0.92 million bpd in 2012. We also believe growth in the non-oil economy will remain robust on high investment and public and private consumption. We estimate real per capita GDP at $21,600 in 2012.
“Oman’s annual average real GDP per capita growth of about 1% during 2006-2016 is low compared with peers. We attribute this low trend largely to Oman’s fast population growth: 4.5% on average during 2005-2011. We note, however, that reported population figures might not be accurate. They have also fluctuated greatly in recent years, which could distort GDP per capita data. Oman attracts a large number of foreign workers who accounted for 86.5% of private sector employment (2011 official estimate); expatriates also accounted for 39% of the total population (mid-2011 estimate).
“The government continued to build on its fiscal buffer last year. Fiscal stimulus notwithstanding, the government posted a fiscal surplus that we estimate at 3.3% of GDP. Preliminary fiscal data indicate that government spending reached 43% of GDP last year, from 40% in 2011. We expect a larger surplus this year (4.2% of GDP) as the impact of one-off measures from 2011-2012 tapers off. We also base this estimate on Oman’s 2013 oil export price remaining unchanged from last year at $110 per barrel. A risk to the government’s fiscal performance is its reliance on volatile hydrocarbon revenue: 88% of total revenues in 2012. However, the government’s large stock of liquid assets–at more than 25% of GDP–mitigates this risk.
“In our view, the government is becoming increasingly reliant on oil prices remaining high. Its initiative to expand public sector employment to generate jobs for Omanis, as well as its increased spending on benefits and social welfare and its large investment program, has increased this dependency. If oil prices were to drop, we believe that some of this spending would be difficult to curb. We note, however, that if government revenues fell short of spending needs over 2014-2015 it could draw down on previous surpluses. We view as likely the government continuing to issue bonds in domestic currency to help develop the domestic debt capital market. We expect the general government debt to expand by about 1% of GDP annually during 2013-2015.
“The large oil windfall in recent years has helped further strengthen Oman’s external position. We estimate that the current account surplus reached 12.8% of GDP in 2012, and we believe this will continue this year at 11.3%. Oman is in a strong net creditor position; we estimate its narrow net external assets will average 89% of current account receipts (CARs) in 2013-2015. Similarly, the country’s external liquidity position is ample with gross external financing needs at about 81% of CARs and usable reserves during 2013-2015.
“Notwithstanding its external flexibility, monetary policy is limited in Oman by the peg of the Omani riyal to the US dollar. Furthermore, the transmission of monetary policy is constrained by an underdeveloped local capital market.”