While solid economic growth continues to support Oman (A1 negative), its very high economic and fiscal reliance on the oil and gas sector and limited scope for fiscal reforms will add pressure to public finances in 2015-16, Moody's Investors Service said in a report on Thursday.
“We expect Oman's fiscal deficits to widen from 2015 onwards, as hydrocarbon-related government revenues drop by more than 40% this year. However, Oman's low government indebtedness — at around 5% of GDP in 2014 — gives it room to increase debt issuance to finance budget deficits,” said Steffen Dyck, a senior analyst at Moody's.
The rating agency projects that Oman will report substantial fiscal deficits in 2015 and 2016, at around 12% of GDP, as government revenues will be negatively impacted by lower oil prices.
Moody's estimates Oman's fiscal breakeven oil price — the price of oil at which the budget can be balanced — at $105 per barrel in 2015. This is high compared to its peers, and almost double Moody's base case projection of $55 p/b for Brent in the same year, and $57 p/b in 2016, suggesting fiscal deterioration if oil prices remain subdued.
The rating agency forecast that Oman's GDP growth will slow to around 3% over 2015-2016, down from the 4.9% average between 2005-14, owing to pressure on the oil and gas sector. The latter accounted for 48% of nominal GDP on average between 2005-14.
According to Moody's, Oman's high levels of current government spending are not sustainable under a multi-year, low oil price scenario.
However, Moody's noted that Oman has sizeable financial buffers which the rating agency estimates at 82% of 2014 GDP.
In addition, Oman's high domestic savings and healthy banking sector will continue to provide stable funding for the government, said Moody's. As a result, liquidity risk is unlikely to significantly affect government debt sustainability.
Moody's noted that regional geo-political events pose low-probability but high-impact risks for Oman. However, these risks are to some degree mitigated by Oman's position as a neutral, mediating nation in the region, as well as its close relations with major global powers.
