Capital Intelligence, the international credit rating agency, considers Oman’s ‘A’ sovereign credit rating to be capable of withstanding a temporary downturn in oil prices this year and possibly next owing to the authorities’ sizeable reserve cushions. However, a prolonged period of oil prices below USD45 a barrel would likely result in the steady erosion of credit fundamentals and lead to negative rating actions.
The recent slump in oil prices and global financial crisis pose major policy challenges and will contribute to markedly lower economic growth and weaker fiscal and external accounts in 2009. Capital Intelligence expects Oman’s economy to grow by about 3% in real terms, down from an estimated 7.5% in 2008, reflecting tighter financial conditions, a slowdown in the rate of project implementation and weaker external demand.
The fiscal position will deteriorate significantly in 2009. Assuming the government adheres to its expenditure plans and oil production reaches the targeted level of 805,000 barrels a day, Capital Intelligence estimates the breakeven oil price for the 2009 budget to be about USD50 a barrel – someway above the current market price. At USD45 a barrel, which is Capital Intelligence’s assumption for the annual average oil price, the budget, including estimated transfers to reserve funds, would record a deficit of around 3% of GDP. The outturn could be somewhat worse, however, as actual spending tends to exceed budgeted spending and the balance of risks to oil prices and output is to the downside.
Although the budget deficit is likely to be large, it does not pose a near-term financing risk given the accumulation of financial reserves via fiscal surpluses over the past ten years. Government financial assets, excluding domestic equity stakes, probably exceed 35% of GDP and certainly dwarf government debt, which is comparatively low at about 4.5% of GDP. Plans to channel around OMR90mn (about 0.4% of GDP) of public savings into an investment stability fund to support the local stock market will not have a significant impact on the strength and flexibility of the government’s balance sheet.
Fiscal deficits of 3% of GDP or more are not sustainable over the medium term, however, and unless oil prices return to above USD50 a barrel, the government will have to rein in public spending to prevent its asset buffer from being gradually run down. With oil and gas accounting for more than 75% of total exports of goods and services, lower international energy prices will contribute to a shift in the external current account position from an estimated surplus of 10% of GDP in 2008 to a projected deficit of 6% this year. Financing is not a concern at this stage and Oman’s capacity to absorb a balance of payments shock is high. According to Capital Intelligence’s estimates, official foreign assets, which include central bank foreign exchange reserves of USD11 billion (about 21% of GDP) and the external assets of the State General Reserve Fund, are more than twice as large as the projected gross external financing requirement for 2009, defined broadly to include all banking sector foreign liabilities in addition to public and corporate external debt falling due within a year and the current account deficit.
The impact of the global financial crisis on the banking system has so far been limited, reflecting reasonably conservative practices with respect to funding, lending and investments. Banks are closely supervised by the central bank and have little exposure to US sub-prime securities and credit derivatives. Reliance on external funding is moderate at about 15% of total assets and the foreign liabilities of the banking system are exceeded by banks’ foreign assets. Banks have no trading portfolios and low available-for-sale exposure to equities, so mark-to-market losses stemming from the recent decline in local and regional stockmarkets are expected to be modest. The Central Bank of Oman has taken steps to support liquidity, particularly US dollar liquidity which has tightened as a result of global deleveraging. The required reserves ratio has been reduced by three percentage points to 5%, a US dollar reverse swap facility introduced, and around USD2 billion made available for a lending scheme under which banks unable to secure foreign credit lines are able to borrow directly from thecentral bank.
The main risk to the banking sector would appear to be a worsening of asset quality as the economy slows. Capital Intelligence believes the banking system should be able to weather a moderate economic downturn as all banks are adequately capitalised, most currently have low non-performing loan ratios, and loan-loss provision coverage ratios are fairly good. Capital Intelligence notes, however, that private sector credit has grown rapidly in recent years (by 39% in 2007 and around 50% in 2008) and much of the aggregate loan book is unseasoned and untested. A deeper or longer downturn than currently envisaged would likely place a much greater strain on credit quality and profitability, and consequently on banks’ credit ratings.