Moody's: Oman's extensive assets cushion fiscal deterioration
Oman's A2 investment-grade sovereign ratings maintain their stable outlook despite the collapse in international oil prices since July 2008 and much tougher economic prospects for 2009, says Moody's Investors Service in its new annual credit report on the country.
"The government's extensive offshore financial assets will enable it to provide fiscal stimulus and fund projected deficits without resorting to debt accumulation, at least over the short to medium term," says Tristan Cooper, a Moody's Vice-President / Senior Analyst and author of the report.
The government's gross financial assets plus the central bank's foreign exchange reserves amounted to around 75% of GDP at the end of 2008, while
the government's debt remained very small. This justifies Moody's assessment that Oman has a high level of government financial strength despite a sizeable projected fiscal deficit in 2009.
Moody's notes the enhanced volatility of Oman's economic performance because of its heavy reliance on oil and gas exports. Real growth is expected to slow significantly in 2009. Nevertheless, the country's nominal GDP per capita, which is likely to contract by around 15% this year, will continue to rank highly on the global scale. Moody's considers Oman to have a high level of economic strength.
One challenge that Oman faces is the rising cost of oil production. "It is encouraging that Oman's oil output has recovered since its trough in 2007, but the use of expensive enhanced oil recovery techniques is pushing up the cost of this production," explains Mr Cooper. The average cost of pumping oil in Oman rose from around $8/barrel in 2005 to $16/barrel in 2008 and is likely to climb further over the medium term.
Oman's ratings are supported by the country's low event risk. While Moody's considers the risk of domestic political upheaval to be minor given the country's recent history of internal stability, the volatile regional political environment is of some concern. "Economic and financial risks are mitigated by the strong international investment position and the relative soundness of the country's banks, which seem to have little direct exposure to the global financial crisis", says Mr Cooper.
Oman's institutional strength is assessed as high. This reflects the country's relatively strong ranking on indicators of institutional quality and the government's seemingly solid commitment to repay. "Yet we note that Oman's institutions are still developing and their quality continues to lag that of higher rated countries," cautions Mr Cooper.
"Moody's will continue to monitor the government's use of its large assets carefully given that these are a central pillar of its investment-grade ratings," concludes Mr Cooper.