Oman’s economy has been struggling since the collapse of oil prices in 2014.
S&P Global Ratings started a 12-month countdown for Oman to steady its public finances and stop loading up on external debt — or risk an even deeper descent into junk.
Rated A by S&P as recently as four years ago, the company put the sultanate on notice on Friday by cutting the outlook to negative while affirming its debt score at BB, two levels below investment grade and on par with Paraguay and Serbia. Both Fitch Ratings and Moody’s Investors Service have Oman one notch higher than S&P.
“The negative outlook reflects our expectation that we could lower our ratings on Oman over the next 12 months if we view the government as unable to moderate external debt accumulation related to still-sizable fiscal deficits, which we expect will continue to increase through 2022,” S&P analysts led by Zahabia Gupta said in a report.
Oman’s economy has been struggling since the collapse of oil prices in 2014, forcing the government to join other Gulf countries in tapping international debt markets to plug budget shortfalls. But it’s been slow to implement fiscal reforms despite dwindling reserves, even raising worry it could follow Bahrain in needing a bailout from wealthier neighbors.
S&P, the first of the major credit assessors to give Oman a non-investment grade, said its ratings reflect a view that “timely support” for the monarchy “would be forthcoming, if needed,” from countries in the Gulf Cooperation Council. Moody’s, which downgraded Oman’s credit rating to junk in March, said it probably won’t require a rescue in the next 12 to 18 months because the government doesn’t have any significant debt coming due in that period and its buffers are sufficient for now.
Still, the yield on Oman’s bond due in 2028 remains higher than Bahrain’s similar-maturity debt, which rallied last year after the nation won a $10 billion bailout package and inclusion in JPMorgan Chase & Co.’s emerging-market bond indexes. S&P rates Bahrain two levels lower than Oman at B+.
With large Eurobond maturities coming due in 2021 and 2022, “the debt structure is vulnerable to a sharp decline in foreign investor confidence in Oman,” S&P said. That “could add significant pressure to foreign-exchange reserves,” it said.
Oman, which S&P said will become a net debtor in 2019, is trying to cope by planning to slash its borrowing requirements for this year by as much as 70 percent and rely instead on asset sales to plug one of the largest budget deficits among oil exporters.
Gross general government debt increased to an estimated 49 percent of gross domestic product in 2018, from below 5 percent in 2014, and could reach about 64 percent by 2022, according to S&P. The share of foreign-currency debt predominantly held by nonresidents grew to 80 percent of the total in 2018, from 26 percent in 2015 S&P estimates Oman’s budget shortfall narrowed to 8.9 percent of GDP in 2018, thanks to higher oil prices, and expects fiscal deficits to stay at about 8.7 percent on average over the next four years, “without additional fiscal adjustments relative to our base case. Oman’s large fiscal deficits require rising levels of external financing” Current spending rose by more than 10 percent in 2018. Oman will probably relay on one-off items to cover “a significant portion” of this year’s deficit financing Helped by rising energy production, Oman’s economic growth to average about 3 percent in 2019-2022, according to S&P
Strains on Oman’s economy can also grow as its access to foreign funding becomes more costly after increases in U.S. interest rates. S&P said that another reason it could consider a downgrade is “if the government’s funding costs increase beyond our expectations, or if funding pressures rise.”