DUBAI: ARAB NEWS
Published — Sunday 23 June 2013
Last update 23 June 2013 5:17 am
Standard & Poor's Ratings Services yesterday affirmed its "A/A-1" long- and short-term foreign and local currency sovereign credit ratings on the Sultanate of Oman. The outlook is stable. The transfer and convertibility (T&C) assessment remains "AA-".
The ratings are supported by Oman's strong net external and general government asset positions and prudent investment policies. They are constrained by our view of its heavy dependence on hydrocarbons and its challenging demographic profile; nearly 60 percent of the population is under 25 (mid-2011 official estimate).
It is also subject to geopolitical risk, similar to other sovereigns in the Gulf Cooperation Council (GCC). This is somewhat mitigated by the country's strong alliances with international powers, as well as its ability to maintain a neutral and independent stance in the region.
Policy setting and direction largely hinges on the sultan himself. "In our view, this places the effectiveness and predictability of policymaking at risk." Political institutions are at a nascent stage of development relative to nonregional peers rated in the "A" category. While the sultan has taken some measures to expand political participation, the system remains highly centralized, with limited accountability of institutions. Moreover, uncertainty over succession also poses political risks, in our view.
Oman's economy is performing well. "We expect real GDP growth to reach 5 percent this year, underpinned by an increase in oil production to an average of 0.94 million barrels per day (bpd) from 0.92 million bpd in 2012. We also believe growth in the nonoil economy will remain robust on high investment and public and private consumption. We estimate real per capita GDP at $ 21,600 in 2012."
Oman's annual average real GDP per capita growth of about 1 percent during 2006-2016 is low compared with peers. We attribute this low trend largely to Oman's fast population growth — 4.5 percent on average during 2005-2011. We note, however, that reported population figures might not be accurate. They have also fluctuated greatly in recent years, which could distort GDP per capita data. Oman attracts a large number of foreign workers who accounted for 86.5 percent of private sector employment (2011 official estimate); expatriates also accounted for 39 percent of the total population (mid-2011 estimate).
The government continued to build on its fiscal buffer last year. "Fiscal stimulus notwithstanding, the government posted a fiscal surplus that we estimate at 3.3 percent of GDP. Preliminary fiscal data indicate that government spending reached 43 percent of GDP last year, from 40 percent in 2011. We expect a larger surplus this year (4.2 percent of GDP) as the impact of one-off measures from 2011-2012 tapers off. We also base this estimate on Oman's 2013 oil export price remaining unchanged from last year at $ 110 per barrel." A risk to the government's fiscal performance is its reliance on volatile hydrocarbon revenue: 88 percent of total revenues in 2012. However, the government's large stock of liquid assets — at more than 25 percent of GDP — mitigates this risk.
"In our view, the government is becoming increasingly reliant on oil prices remaining high. Its initiative to expand public sector employment to generate jobs for Omanis, as well as its increased spending on benefits and social welfare and its large investment program, has increased this dependency. If oil prices were to drop, we believe that some of this spending would be difficult to curb. We note, however, that if government revenues fell short of spending needs over 2014-2015 it could draw down on previous surpluses. We view as likely the government continuing to issue bonds in domestic currency to help develop the domestic debt capital market. We expect the general government debt to expand by about 1 percent of GDP annually during 2013-2015."
The large oil windfall in recent years has helped further strengthen Oman's external position. "We estimate that the current account surplus reached 12.8 percent of GDP in 2012, and we believe this will continue this year at 11.3 percent. Oman is in a strong net creditor position; we estimate its narrow net external assets will average 89 percent of current account receipts (CARs) in 2013-2015." Similarly, the country's external liquidity position is ample with gross external financing needs at about 81 percent of CARs and usable reserves during 2013-2015.
Notwithstanding its external flexibility, monetary policy is limited in Oman by the peg of the Omani rial to the US dollar. Furthermore, the transmission of monetary policy is constrained by an underdeveloped local capital market.
The stable outlook balances Oman's strong fiscal and external position — which provides a more-than-ample buffer to withstand external shocks — against risks from structural and institutional weaknesses, which could derail policymaking; a difficult demographic profile that could challenge economic policy; and limited monetary policy flexibility.
"We could consider lowering the ratings if the pace of economic growth, diversification, and structural reform is not sufficient to increase per capita real GDP growth to a pace comparable to peers. Downward pressure on the ratings could also build from a protracted weakening in fiscal performance, for example as a result of continued increases in spending on the public-sector wage bill, which could lead to an increase in government debt and a fast drawdown of government assets.
"We could consider an upgrade if the underpinnings of economic growth strengthen, raising per capita income levels and addressing social challenges, including unemployment."