The outlook for Oman's banking system remains negative as loan quality weakens and access to funding is tight in a subdued economy, Moody's Investors Service said in a report published Monday.
"The challenging environment for businesses and households will lead to increased problem loans," said Mik Kabeya, Assistant Vice President at Moody's.
"Our negative outlook for the sector also takes account of the government's declining capacity to support the country's banks in case of need."
Problem loans are set to rise to around 3.2%-3.7% of gross loans in 2019-20, from 2.8% in June 2019. Loan concentration to the stressed construction sector and to a few large borrowers heightens risk.
Still, Moody's expects capital to remain sound and profitability to be robust, though edging lower. Net interest margins will narrow slightly in line with declining US rates. Operating expenses will be stable, but loan loss provisioning needs will increase as problem loans start to rise.
Oman's real GDP growth will remain subdued at 1.6% in 2019, rising to 2.7% in 2020. Economic momentum is restricted by OPEC cuts and by public spending restraint since oil prices fell in 2014. Constrained government finances will limit banks' access to funding and liquidity, and credit growth will remain stable at 6.5% through 2019 and 2020, well below historic levels.