Emerging markets rating agency Capital Intelligence (CI) has affirmed Oman's long-term and short-term foreign currency ratings at BBB and A3, respectively. The ratings agency also assigned a long-term local currency rating of BBB+ to the sovereign and a short-term local currency rating of A2. The long-term outlook is stable.
Oman's sovereign ratings balance a sizeable hydrocarbon resource base, an improving outlook for the non-oil economy, and sound external finances against structural weaknesses and the need for fiscal consolidation.
Oman's economy has evolved along a moderate growth path in recent years with real gross domestic product (GDP) expanding at an annual average rate of 4.1 percent in 1998-2002. The development of liquefied natural gas (LNG) has been a key source of GDP growth in recent years and provides Oman with a new source of long-term foreign exchange earnings.
Other gas-intensive, export-oriented industries are also being developed, including fertilizers, petrochemicals and aluminium. The outlook for non-hydrocarbon sectors appears brighter with the establishment of a free trade zone and broader structural reforms including privatization and the easing of rules on foreign investment.
The current account has recorded large surpluses in recent years and the external debt stock is estimated to have declined to around 29 percent of GDP in 2002 from 45 percent at end-1998. Official foreign exchange reserves are adequate and fully cover external debt falling due in 2003. The authorities also have the option of drawing on the substantial foreign assets of the State General Reserve Fund should any unforeseen payments difficulties arise in the short term.
A key constraint on Oman's ratings is its dependence on oil. The commodity contributed 42 percent of nominal GDP and accounted for 72 percent of budgetary revenues and 70 percent of current account receipts in 1999-2001. Economic activity and the public finances are highly vulnerable to world oil price volatility as a result.
Moreover, since crude oil and LNG prices are linked, LNG provides only a partial form of national output and foreign exchange diversification. CI notes that gross domestic investment is relatively low in Oman and private investment in non-oil/gas sectors was equivalent to just two pecent of GDP in 1999-2001. This raises doubts about the capacity of the non-hydrocarbon economy to absorb a growing working-age population.
CI also notes that after much improvement in the first half of the 1990s, the underlying fiscal policy stance has changed little in recent years. CI estimates that the non-hydrocarbon primary deficit narrowed to an average of 27.5 percent of GDP in 2000-02, from 28.2 percent in 1997-99, although the implied improvement is exaggerated by buoyant oil market conditions in the former period.
However, the overall government primary balance has posted surpluses averaging four percent of GDP in 1998-2002 and this has contributed to a decline in the total stock of government debt to around 18 percent of GDP in 2002 from 26.7 percent in 1999.
The higher local currency ratings assigned to the sovereign reflect the government's ability to levy taxes and raise non-oil/tax revenues, and to tap a captive domestic investor base. However, fiscal flexibility is constrained by a small tax base and high dependence on a largely exogenous variable, namely oil, for budgetary revenue. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
