Oman’s ratings raised on better public finances, non-oil growth

The international emerging markets credit rating agency Capital Intelligence has raised Oman’s long-term foreign currency rating to A- from BBB+ and its long-term local currency rating to A from A-.

The agency has also raised the sovereign short-term local currency rating to A1 from A2, while maintaining a ‘stable’ outlook.

The upgrade reflects the improvement in public and external finances and improving prospects for the non-oil economy, which the Cyprus-based rating agency expects to continue over the coming years.

Capital Intelligence said that, “Oman’s macroeconomic performance has been strong in recent years as evidenced by robust GDP growth, low inflation and comfortable fiscal and external current account surpluses.”

The Gulf state’s economic activity has expanded briskly, underpinned by increased investment in infrastructure and industry and supported by high oil prices.

The development of gas-intensive, export-oriented industries has gained momentum and petrochemical, fertiliser, aluminium, and iron and steel projects are all expected to commence operations over the next few years, the rating agency added.

The favourable outlook for non-hydrocarbon sectors is also supported by the signing of a free trade agreement with the U.S. in 2006, substantial investment in tourism and measures to improve the skills and employability of the local labour force.

High international oil prices and an increase in the volume of liquefied natural gas (LNG) exports have contributed to a steady run of current account surpluses which have translated into a strong external balance sheet, which mitigates the economic and financial risks associated with external shocks.

Capital Intelligence estimates that the combined foreign financial assets of the state and commercial banking sectors exceeded gross external debt by about 45% of GDP at the end of 2006.

Central bank foreign exchange reserves of USD 5 bln at end-2006 provide adequate backing for the fixed exchange rate regime and, at 204% of estimated external debt falling due in 2007, suggest that the central bank would be able to cushion the impact of any external shocks in the near term.

Government finances have been strengthened in recent years using budget surpluses to accumulate external financial assets, both for future generations and as a buffer against economic and oil price shocks, and to reduce its debt.

However, Oman’s ratings remain constrained by the country’s over-reliance on oil, which accounted for 42% of nominal GDP, 66% of exports of goods and services, and over 80% of budget revenue in 2003-06, and also by the challenge of diversifying the economy and generating sufficient jobs for a fast-growing workforce.