Moody's issues annual sovereign report on Oman

Moody's Investors Service explains in its new sovereign credit report on Oman that the country's investment grade A2 foreign and local currency government bond ratings with a stable outlook primarily reflect the very strong public finances, with the maintenance of a wide fiscal surplus and ongoing accretions to net official assets on the back of buoyant oil receipts. The ratings were last changed in July 2007 when they were upgraded from A3. Other A2-rated countries include Bahrain, Botswana, Chile, Korea, and Poland.

"The favourable trend in Oman's government finances has continued. Moody's estimates that the overall fiscal surplus was around 10% of GDP in 2007 and that the level of net official foreign assets (the government's net foreign financial assets plus the central bank's foreign exchange reserves) approached 80% of GDP at year-end," says Tristan Cooper, a Moody's Vice-President / Senior Analyst and author of the report. "We project another wide fiscal surplus in 2008 given that average global oil prices are expected to exceed US$90 per barrel, their highest ever annual average," Mr Cooper adds.

While the short- to medium-term outlook for Oman's public finances is therefore very sound, Moody's has some concerns with regard to the longer-term prognosis in light of two factors. "The first concern relates to inflation, which has risen significantly in recent years, reaching a 16-year high of 8.3% in December 2007. Rising costs and popular demands for expenditure increases to offset the effects of inflation, coupled with an ambitious public investment plan, are contributing to a marked loosening of fiscal policy. This will erode fiscal flexibility," Mr Cooper cautions.

"Secondly, there are growing uncertainties over the long-term outlook for the country's hydrocarbon sector. Oman's crude oil production peaked in the late 1990s and has since been on a declining trend. While there is hope that the fall in crude production will finally be halted this year and possibly reversed, remedial action is increasingly costly. Meanwhile, Oman's gas production is failing to keep pace with burgeoning gas demand, constraining the growth prospects for the country's energy-intensive industrial sector," Mr Cooper explains.

Moody's also highlights that, in light of the still heavy dependence of the Omani public finances on hydrocarbon receipts, there is a growing need to diversify the government's sources of revenue to preserve fiscal sustainability over the longer term.