Oman's sovereign foreign assets forecast to slump by 2018

Oman’s sovereign net foreign assets are forecast to fall to 28 percent of GDP by 2018 from 48.5 percent at the end of 2016 due to external debt issuance and draw-downs from wealth funds to finance budget deficits, according to Fitch Ratings.

The ratings agency, which also said in a statement that the earlier sharp fall in oil and gas prices had hit Oman hard,  published Oman’s long-term foreign and local currency issuer default ratings (IDRs) of ‘BBB’ with a stable outlook.

It said Oman’s ratings reflected its low public and external debt, strong balance sheet and high GDP per capita, balanced against its double-digit fiscal deficit and a very hydrocarbon-dependent budget and economy.

Fitch also said it expects the government’s net domestic assets (mostly bank deposits minus local debt) will remain above 10 percent of GDP.

“We expect hydrocarbon revenues to fall by 22 percent in 2016, after a 41 percent drop in 2015, but they will still make up around 70 percent of government revenue,” Fitch said in the statement.

It added: “We expect current spending to fall by 5 percent in 2016, after a 15 percent cut in 2015, mostly due to a drop in subsidy expenditure as a result of lower oil prices and the removal of subsidies. Nevertheless, the government budget deficit will still have widened to 17.2 percent of GDP in 2016.

“We expect deficits to decline as oil prices recover and fiscal measures take effect, to 14.4 percent of GDP in 2017 and 6.4 percent of GDP in 2018.”

Fitch added that electricity tariffs will be hiked for large consumers in 2017, further lowering the subsidy bill. Increases to various fees and levies, removal of corporate tax exemptions and an increase in corporate tax rates could boost non-oil revenue by 1 percent of GDP in 2017.

The agency noted that in 2018, the introduction of VAT could add around 1 percent of GDP, an increase in oil prices by $10/barrel could add 5 percent of GDP, and more gas production could add another 1 percent of GDP to revenue in 2018.

It added that risks to this fiscal adjustment are skewed to the downside, with oil prices expected to stay well below its estimates of fiscal breakeven levels for Oman of $69/barrel by 2018.

The government is using its reserve funds for deficit financing, having built them up in years of higher oil prices and is planning to meet two-thirds of its financing needs through external debt issuance, and the remainder through reserve draw-downs.

Fitch forecasts real GDP will grow 3 percent in Oman in 2016, mainly due to strong increases in oil and gas production but non-oil activity growth is expected to slow to 2.5 percent in 2016 and 2 percent in 2017.

Fitch also said that uncertainty remains surrounding the succession to 76-year old Sultan Qaboos, who recently underwent extensive medical treatment abroad but has not publicly designated a successor.