(The following statement was released by the rating agency)
July 02 -
-- Economic measures and better prospects for political participation are helping address popular demands and restoring stability to the domestic political landscape, in our view.
-- We are therefore revising the outlook on our long-term sovereign credit ratings on Oman to stable from negative.
-- We view Oman’s net external and general government asset positions as substantial; we are therefore affirming our ‘A/A-1’ long- and short-term ratings on Oman.
On July 2, 2012, Standard & Poor’s Ratings Services revised its outlook on the Sultanate of Oman to stable from negative. At the same time, we affirmed our ‘A/A-1’ long- and short-term sovereign ratings on the Sultanate. Oman’s transfer and convertibility (T&C) assessment remains ‘AA-'.
The outlook revision reflects our view that political reforms and economic measures are helping address popular demands and restoring stability to the domestic environment. The ratings are supported by Oman’s substantial net external and general government asset positions and prudent investment policies, and constrained by, in our view, a heavy dependence on hydrocarbons, political risk, and a challenging demographic profile--60% of the Omani population is under the age of 25 (source: 2010 census data). Oman, similar to other sovereigns in the Gulf Cooperation Council, is subject to geopolitical risk. 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.
The government responded to the unrest by giving large handouts to the Omani population in wages and benefits, and by committing to the creation of up to 75,000 jobs. We expect a significant share of these to be generated in the public sphere. According to our base-case scenario, we anticipate that social spending will rise during 2012-2015, but that the government’s resources will be sufficient to manage this increase without incurring a weakening in its fiscal buffers.
Currently, Omanis account for only 14% of employment in the private sector; most private-sector employees are foreign nationals. Providing young people with employment opportunities outside the public sector would require far more of the jobs in the private sector to be filled by Omanis.
Oman has witnessed some reforms in the political sphere over the past year. The Shura Council was granted legislative and regulatory role which is improving political participation to some extent, and introducing some checks and balances into the system.
Sultan Qaboos, Oman’s ruling monarch for 41 years, has championed these changes. His vision has helped the country accomplish impressive development credentials. We remain concerned, however, over the lack of clarity regarding the succession and the sultan’s overarching role in a number of institutional functions, which raises the risks regarding the continuity and predictability of policy making.
While the political transition and changing rule of the Shura Council have been broadly successful, social discourse remains focused on labor issues. The country recently witnessed labor strikes in a number of sectors including the oil industry. For example, in May 2012, 400 oil sector workers protested because of their labor conditions and were initially dismissed from their jobs. In this instance, the Shura Council and the government helped negotiate a settlement between labor leaders and the industry, and the workers returned to their posts. In our opinion, the government and Shura Council are likely to continue to play a mediating role in labor relations.
Despite the popular unrest during February-May 2011, the economy grew strongly in 2011, by an estimated 5.5%. The growth was primarily based on strong public and private consumption. The hydrocarbon sector was also an important contributor to growth last year--oil production rose to 885,000 barrels per day (bpd) from 865,000 bpd in 2010. Moreover, Oman’s average oil export price rose to $103 per barrel from $77 per barrel in 2010, bolstering government foreign currency revenues significantly. We expect economic growth to remain at around 5% in 2012, boosted by high government spending coupled with high private consumption and investment.
The strong oil windfall in 2011 helped bolster the government’s financial buffer. The fiscal surplus reached 7% in 2011 (including oil revenues allotted to the various investment and savings funds and the government’s investment income). The 50% increase in the government’s revenues from hydrocarbon was more than sufficient to offset a 44% increase in current spending. This increase included higher outlays for wages and social and employment benefits in line with the measures taken last year in the aftermath of the social unrest.
Despite the increase in the public sector wage bill and the full year effect from the increases in social and unemployment benefits instituted last year, we expect the fiscal surplus this year to reach around 5% of GDP, contingent on Oman’s oil export price averaging around $100 per barrel for the year as a whole. We have excluded from our base-case scenario any resources from the Gulf Cooperation Council Development Fund since the fund does not appear to be capitalized yet. We estimate the general government’s net asset position at around 67% of GDP in 2012. On the external balance, we expect the current account surplus to reach 10% of GDP in 2012, compared with 14% in 2011.
In our baseline scenario, the government’s hydrocarbon-dominated revenue base is more than sufficient to cover the higher social spending outlays that we have factored in during 2012-2015. Nonetheless, we remain concerned that a sharp and sustained deterioration in the country’s terms of trade--for example, through a sharp decline in the oil export price--could weaken public finances tangibly, forcing the government to tap its external assets to meet public spending needs.
The stable outlook reflects our view that the domestic political environment has generally stabilized. The government’s fiscal performance is expected to remain favorable over the forecast period allowing it sufficient room to address the higher social spending expected over the ratings horizon. We could lower the ratings if political pressures intensify or if we see a sustained weakening in fiscal performance, as might occur following a sharp decline in the oil price.
Alternatively, we could raise the ratings if the underpinnings of economic growth strengthen, raising per capita income levels and improving diversification prospects.
Related Criteria And Research
-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009
Ratings Affirmed; CreditWatch/Outlook Action
Oman (Sultanate of)
Sovereign Credit Rating A/Stable/A-1 A/Negative/A-1
Senior Unsecured A
Short-Term Debt A-1
Transfer & Convertibility Assessment AA-