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Resurgent oil prices are expected to positively impact Oman’s twin deficits – the fiscal deficit and the public debt – effectively returning them to pre-pandemic levels within the next couple of years, according to international ratings agency Moody’s.
The New York-based international financial research service however cautioned in its latest ratings action on Oman that the improved outlook is contingent on the scrupulous implementation of fiscal adjustment measures set out in the government’s National Programme for Fiscal Balance (Tawazun).
The upbeat assessment came in new ratings action announced by Moody’s on Thursday effectively upgrading its outlook on the Government of Oman's issuer rating to stable from negative. In addition, Moody’s affirmed its long-term issuer and senior unsecured ratings at Ba3, while also affirming the Government of Oman's (P)Ba3 senior unsecured medium term note programme rating.
“Moody's estimates that higher oil prices will account for around half of the expected reduction in the fiscal deficit to less than 2 per cent of GDP in 2021 from 18 per cent of GDP in 2020,” the agency said.
“Furthermore, based on Moody's assumption that prices continue to average above $60-65/barrel in 2022-23, fiscal deficits will likely remain small in the medium term, underpinning a large and likely durable reduction in the government's gross financing needs to less than 10 per cent of GDP per annum during 2021-23 from more than 22 per cent of GDP in 2020,” it stated.
SHRINKING DEFICITS
Similarly, the Sultanate’s current account deficit is projected to shrink to less than 4 per cent of GDP in 2021 – 2023, down from over 13 per cent in 2020. “These lower fiscal and current account deficits will more than offset the increase in scheduled external government debt repayments, which will more than double to around 9 per cent of GDP on average during 2021-23 from less than 4 per cent of GDP in 2020,” Moody’s further noted.
In addition to reining in expenditure, the Tawazun programme proposes rollbacks of all subsidies (save for those targeted at economically vulnerable sections of the national population), controlling the public sector wage bill, freezing budgetary capital spending, diversifying and growing non-oil revenue streams, and potentially introducing a personal income tax on high-income earners.
Buoyant oil prices will also help whittle down the government’s soaring public debt to around 67 per cent of GDP in 2021, down from a peak of nearly 80 per cent of GDP last year. This reduction will be driven by the growth of the hydrocarbon sector buoyed by higher oil prices. By 2024, and assuming oil prices will remain resilient, Oman’s debt burden could decline back to pre-pandemic levels of around 60 per cent of GDP, said Moody’s.
NEW HOLDING COMPANY
Complementing high oil prices in driving the reducing of the twin deficits over the medium term is the government’s decision to pass its longstanding budgetary burden in relation to the hydrocarbon sector to the newly established Energy Development Oman (EDO), the ratings agency noted. That budgetary responsibility amounted to an average of $4.8 billion annually over the past five years, contributing around 6.5 – 7 per cent of GDP to the fiscal deficit every year.
Moody’s also underlined the importance of a transformation of the Omani economy and the government’s revenue base particularly as many leading countries move away from hydrocarbons towards greener energies. Hydrocarbon exports currently account for over 70 per cent of government revenue.
“In the near to medium term, Oman's financing conditions are likely to be increasingly shaped by prospects that such a transformation is underway and investors' assessment of Oman's capacity to respond to carbon transition,” Moody’s added.
OUTLOOK REVISION
In revising Oman’s economic outlook from negative to stable on Thursday, the agency cited higher oil prices and the ongoing implementation of the government's medium-term fiscal adjustment programme that will “underpin a steady decline in the direct government debt burden to the pre-pandemic level”.
It comes on the heels of an even more upbeat ratings upgrade from S&P Global Ratings earlier this month, which revised the outlook on the Sultanate to positive from stable, while also affirming its ‘B+/B’ long-term and short-term foreign and local currency sovereign credit ratings.
In elevating its outlook, S&P stated: “Economic and fiscal pressures on Oman are easing, as the effects of the sharp drop in oil prices in 2020 and the COVID-19 pandemic abates. We project that Oman's reform program will reduce the pace of net government debt accumulation over the next three years. We have therefore revised our outlook on Oman to positive from stable and affirmed the 'B+/B' ratings.”
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