S&P assigns ‘A’ rating to Sultanate of Oman Country expected to maintain strong growth momentum

LONDON, Jan 21, (RTRS): Standard & Poor’s affirms Oman’s credit rating at ‘A’ with stable outlook.
Credit Rating History:
    Local            Foreign currency    currency
23-Jan-2007        A/A-1                        A/A-1
18-Sep-2006       A-/A-2                      A-/A-2

Rationale
The ratings assigned to the Sultanate of Oman (Oman) by Standard & Poor’s Ratings Services are supported by our assessment of Oman’s substantial net external and general government asset positions and prudent investment policies, and are constrained, in our view, by a heavy dependence on hydrocarbons, prevalent political risk, and a challenging demographic profile—60 percent of the Omani population is under the age of 25 (source: 2010 census data). Oman, similar to other sovereigns in the Gulf Cooperation Council (GCC), 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.

Creation
The government responded to the unrest in 2011 by giving large handouts to the Omani population in the form of 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. While we anticipate that social spending will rise between 2012-2015, we expect that the government’s resources will be sufficient to manage this increase without incurring a weakening in its fiscal buffers.

Oman has witnessed some reforms in the political sphere over the past year. The Shura Council was granted a legislative and regulatory role, which is improving political participation to an extent, while some checks and balances have been introduced into the system.

Sultan Qaboos, Oman’s ruling monarch of 41 years, has championed these changes. His vision has helped the country accomplish impressive development credentials. However, we remain concerned about the lack of clarity regarding the succession and the sultan’s overarching role in a number of institutional functions, which raises risks to the continuity and predictability of policy making.

We expect Oman to maintain strong growth momentum. We estimate that economic growth remained at about 5 percent in 2012, boosted by high government spending coupled with high private consumption and investment. We expect real per capita economic growth to average 1.5 percent over 2013-2015.
Despite the increase in the public sector wage bill, and the full year effect from the increases in social and unemployment benefits instituted in 2011, we expect the fiscal surplus to have reached about 9 percent of GDP in 2012, based on an oil export price of $112 per barrel. We have excluded from our base-case scenario any resources from the GCC Development Fund, as the Omani government is in the process of identifying the projects that will benefit from GCC assistance. So far there has been no confirmation that GCC donor countries will begin to disburse funds in 2013. We estimate the general government’s net asset position to be about 64 percent of GDP in 2013.
On the external balance, we expect the current account surplus to reach 14 percent of GDP in 2012, similar to the level registered 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 materially weaken public finances and consequently force the government to tap its external assets to meet public spending needs.
Moreover, despite flexibility on the fiscal front, the conduct of an independent monetary policy is constrained by the pegging of the Omani rial to the US dollar and the underdevelopment of capital markets in the economy.

Outlook
The stable outlook reflects our view that the domestic political environment has stabilized. The government’s fiscal performance is expected to remain favorable over the forecast period, allowing for 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.

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