S&P upgrades Oman’s rating on public sector deleveraging and strengthening finances

The sultanate remains committed to advancing a longer-term structural reform agenda, agency says

The Mutrah Souq in Muscat, Oman. The Gulf country has enacted reforms to boost and diversify its economy. Victor Besa / The National

S&P Global Ratings has raised its long-term foreign and local currency sovereign credit ratings on Oman to 'BBB-' from 'BB+' on the sultanate’s continued public sector deleveraging and strengthening of the government’s public finances.

The New York-based agency also assigned a stable outlook for the sultanate on Friday.

“The Omani government, along with many state-owned enterprises, is continuing to deleverage its balance sheet,” it said.

“The authorities also remain committed to advancing their longer-term structural reform agenda aimed at strengthening economic resilience.”

The agency forecasted that Oman will be in a small net general government asset position by the end of 2024, compared with a net debt position of 19 per cent in 2021.

“The stable outlook balances the potential benefits of the government’s fiscal and economic reform programme against the economy’s structural susceptibility to adverse oil price shocks,” S&P said.

Oman has enacted reforms to boost and diversify its economy, reducing its reliance on the energy sector, most notably on oil and hydrocarbons.

The Gulf state launched a three-year fiscal stability programme in October 2022 to add momentum to its economic recovery from the pandemic-driven slowdown and support the development of its financial sector.

The government has introduced measures to address governance and public finance issues. Along with the introduction of value-added tax (VAT) in 2021, these include gradual cuts to electricity and water subsidies and a tighter rein on capital and current spending.

Oman’s real gross domestic product, which grew 1.3 per cent last year, is expected to moderate at 0.9 per cent this year, on the back of extended oil production cuts to the first half of this year, before accelerating to 4.1 per cent in 2025, the International Monetary Fund said in May.

Oman’s non-hydrocarbon growth is projected to increase to 2.6 per cent in 2024 and 3.2 per cent in 2025, from 2.1 per cent last year, on continued reforms and investment projects.

Surge in oil prices and accelerated reforms under Oman Vision 2040 are expected to boost the economy, the IMF said.

S&P assumes the Oman government will continue gradually reducing its footprint in the economy – that is, moving from owner to regulator – through asset sales to help develop the non-hydrocarbon private sector and attract foreign direct investment.

“Oman’s fiscal position remains highly dependent on oil price movements, but resilience against shocks has strengthened. The authorities remain committed to rationalising expenditure and mobilising non-hydrocarbon revenue through forthcoming measures such as personal income tax and phasing out energy subsidies,” the agency said.

“On the asset side, the government continues to accumulate sizeable liquid buffers through its deposits in domestic institutions and the central bank, alongside its sovereign wealth fund – the Oman Investment Authority.”

The agency said it expects the government’s fiscal and economic reform momentum will continue between 2024 and 2027.

It forecast that Oman’s real GDP will expand about 2 per cent per year on average over 2024-2027 and that the government will post fiscal surpluses of 1.9 per cent of GDP over 2024-2027, assuming Brent oil prices of about $80 per barrel from 2025 until 2027.

Government reform efforts and favourable oil prices should support budget surpluses, S&P said.

It forecast that inflation in the sultanate will remain moderate, averaging about 1.4 per cent per year over 2024-2027, after falling to 0.9 per cent in 2023.

“We project that the increase in hydrocarbon production through 2027 will spur a continued expansion of the non-hydrocarbon sector by about 2 per cent annually,” S&P said.

“To strengthen non-hydrocarbon receipts, we assume the authorities will prioritise improving corporate tax administration and collection over raising government fees or the VAT rate. We expect that the planned personal income tax on high earners, a first in the GCC region, will be introduced after 2026.”