Oman’s maiden sovereign sukuk issuance has been assigned a definitive rating of A1 by Moody's Investors Service. The rating for these debt obligations follows the provisional rating assigned on October 5.
The A1 rating assigned to the certificates is at the same level as the long-term issuer ratings of the Government of Oman, as the sukuk certificate holders will effectively be exposed to Oman's senior credit risk; not be exposed to the risk of performance of the portfolio assets relating to the certificates; will not have any preferential claim or recourse over the assets, or rights to cause any sale or disposition of the assets except as expressly provided under the transaction documents; and only have rights against the Government of Oman, ranking pari passu with other senior unsecured obligations as provided in the transaction documents.
Moody's notes that its sukuk rating does not express an opinion on the structure's compliance with Sharia law.
On October 27, the Government of Oman priced its first-time sovereign sukuk, a five-year domestic issuance of OMR250 million with a rate of 3.5 per cent per annum, payable semi-annually. The sukuk issuance was oversubscribed close to 1.7 times.
Oman's sovereign credit profile displays a number of strengths. Real gross domestic product (GDP) growth will likely remain positive, although Moody's expects it will slow to an average 2 per cent to 3 2 per cent per year until 2019, down from a previously higher growth trend of 4.9 2 per cent on average between 2005 and 2014.
Offsetting this strength to some degree is the likely sharp fall in nominal GDP this year from the collapse in oil prices. This will crimp government and private sector incomes. Moody's base case scenario for oil market trends is a Brent crude price of $55 per barrel on average in 2015 and $53 per barrel in 2016 that rises only gradually to around $75 per barrel by 2019.
Even factoring in the reduced government revenues and resulting higher government debt over the next one to three years, Oman's debt metrics will still compare favourably with the A-rated median. The Omani government has substantial financial assets, as well as deposits in the domestic banking system.
Having said that, uncertainty exists over the effectiveness of the government's policy response to challenges posed by lower oil prices to Oman's government finances, external current account, and growth performance in 2015 as well as over the next three years. This uncertainty is reflected in the negative rating outlook on the Government of Oman's issuer rating.
Given that the issuance rating is tied to the rating of the Government of Oman, the same factors and considerations would apply.
Therefore, given the negative outlook on the government's ratings an upward movement in the rating is highly unlikely. However, containment of government fiscal deficits and consequent increases in government debt, and progress in diversifying the economy and government finances from oil, would place upward pressure on the rating and could cause the outlook to be changed back to stable.
Conversely, downward rating pressures will increase if diversification efforts slow down, and/or government finances deteriorate faster than in our baseline scenario, including a significant rise in the wider public sector debt.
