Fitch revises outlook on Oman to positive; affirms at 'BB'
Published: 03:04 PM,Apr 11,2023 | EDITED : 11:04 AM,Apr 12,2023
International ratings agency, Fitch, has revised the outlook on Oman's long-term foreign-currency Issuer Default Rating (IDR) from stable to positive and has affirmed the rating at 'BB'.
The positive outlook reflects Oman’s lower government debt/GDP, with high oil prices and spending restraint reducing external liquidity risk. The outlook also incorporated Fitch expectation that the government remains committed to fiscal consolidation.
“Fiscal reform should be sufficient to limit a deterioration of Oman's budget, debt/GDP ratio and external position under our assumption of lower oil prices this year and next. Government debt/GDP fell to 40% in 2022, from 61% at end-2021, and we expect it to reach 37% by end-2024, from 48% at our last review in August 2022,” Fitch said.
In its report, Fitch projects a government budget surplus of 2.3% of GDP in 2023, against 4.9% in 2022, Oman's first surplus since 2013.
“We assume the average Brent oil price will fall to $85 a barrel in 2023, while production will be limited by Opec+ production caps agreed in April 2023, leading to a 9% drop in total revenue. This is despite higher tax revenue on stronger tax enforcement and economic activity. Our fiscal balance metric differs from the government, as we exclude some dividends, liquidity and debt management items from revenue and spending.”
"We forecast a budget surplus of 0.1% of GDP in 2024, as a small rise in oil production is likely to be insufficient to counter the effect of lower oil prices of $75/barrel Brent on budget revenue. Non-oil tax revenue should rise to 5.6% of non-oil GDP, from 5.2% in 2022; a modest increase as we do not factor in a mooted value added tax (VAT) hike at this stage,” the agency added.
It also noted that high oil prices and global inflationary pressures have led the government to pause some measures included in its medium-term fiscal plan, including a rise in the VAT rate and the introduction of personal income tax. On the spending side, the timeframe for the elimination of the electricity subsidy, accounting for 1.2% of GDP in 2022, has been extended to 10 years, from five. The government also put in place a fuel-price cap in 2022 that is to remain until at least end-2023 at a cost of about 1.1% of GDP during the year under our oil price assumption.
Fitch projected general government debt to fall to 37% of GDP in 2023 and be broadly stable in 2024, below the 'BB' peer median of 54%. Oman's domestic debt fell by RO 0.9 billion in 2022 and external debt by RO 2.3 billion on strong hydrocarbon revenue. The government repaid a maturing $1.25 billion eurobond in January 2023 and prepaid $1.5 billion of a $4.0 billion facility in March. The Petroleum Reserve Fund was not used for those repayments and stood at over $2.2 billion in March 2023.
Lower external debt has eased external liquidity risk, although debt repayments prevented accumulation of foreign assets.
“We project sovereign net foreign assets to return to a positive position in 2023, after falling to -9% of GDP in 2020, from 53% in 2014. Foreign-exchange reserves will rise only modestly in 2023 as debt repayments continue, to cover 3.3 months of current account payments, below the 'BB' median of 4.2 months. Oman Investment Authority's (OIA) foreign assets are stable, at close to $17 billion. Total net external debt, at 34% of GDP, is double the 'BB' median," the ratings agency noted.
The positive outlook reflects Oman’s lower government debt/GDP, with high oil prices and spending restraint reducing external liquidity risk. The outlook also incorporated Fitch expectation that the government remains committed to fiscal consolidation.
“Fiscal reform should be sufficient to limit a deterioration of Oman's budget, debt/GDP ratio and external position under our assumption of lower oil prices this year and next. Government debt/GDP fell to 40% in 2022, from 61% at end-2021, and we expect it to reach 37% by end-2024, from 48% at our last review in August 2022,” Fitch said.
In its report, Fitch projects a government budget surplus of 2.3% of GDP in 2023, against 4.9% in 2022, Oman's first surplus since 2013.
“We assume the average Brent oil price will fall to $85 a barrel in 2023, while production will be limited by Opec+ production caps agreed in April 2023, leading to a 9% drop in total revenue. This is despite higher tax revenue on stronger tax enforcement and economic activity. Our fiscal balance metric differs from the government, as we exclude some dividends, liquidity and debt management items from revenue and spending.”
"We forecast a budget surplus of 0.1% of GDP in 2024, as a small rise in oil production is likely to be insufficient to counter the effect of lower oil prices of $75/barrel Brent on budget revenue. Non-oil tax revenue should rise to 5.6% of non-oil GDP, from 5.2% in 2022; a modest increase as we do not factor in a mooted value added tax (VAT) hike at this stage,” the agency added.
It also noted that high oil prices and global inflationary pressures have led the government to pause some measures included in its medium-term fiscal plan, including a rise in the VAT rate and the introduction of personal income tax. On the spending side, the timeframe for the elimination of the electricity subsidy, accounting for 1.2% of GDP in 2022, has been extended to 10 years, from five. The government also put in place a fuel-price cap in 2022 that is to remain until at least end-2023 at a cost of about 1.1% of GDP during the year under our oil price assumption.
Fitch projected general government debt to fall to 37% of GDP in 2023 and be broadly stable in 2024, below the 'BB' peer median of 54%. Oman's domestic debt fell by RO 0.9 billion in 2022 and external debt by RO 2.3 billion on strong hydrocarbon revenue. The government repaid a maturing $1.25 billion eurobond in January 2023 and prepaid $1.5 billion of a $4.0 billion facility in March. The Petroleum Reserve Fund was not used for those repayments and stood at over $2.2 billion in March 2023.
Lower external debt has eased external liquidity risk, although debt repayments prevented accumulation of foreign assets.
“We project sovereign net foreign assets to return to a positive position in 2023, after falling to -9% of GDP in 2020, from 53% in 2014. Foreign-exchange reserves will rise only modestly in 2023 as debt repayments continue, to cover 3.3 months of current account payments, below the 'BB' median of 4.2 months. Oman Investment Authority's (OIA) foreign assets are stable, at close to $17 billion. Total net external debt, at 34% of GDP, is double the 'BB' median," the ratings agency noted.