(MENAFN- Muscat Daily) Standard & Poor's Ratings Services revised on Friday its outlook on Oman to negative from stable.
According to the ratings agency this downward revision 'reflects the risk we see that the deterioration in Oman's fiscal or external positions could be sharper than we currently expect or that growth in real GDP per capita could fail to accelerate.'
At the same time S&P affirmed the country's A/A-1 long- and short-term foreign and local currency sovereign credit ratings.
'The affirmation reflects Oman's strong net external and general government asset positions. The ratings are constrained by our view that the quality of Oman's public institutions and governance is moderate that high fiscal external and economic dependence on volatile hydrocarbons receipts will persist and that monetary policy flexibility is limited by the pegged exchange rate' it added.
'Since our last review in June 2014 we have significantly revised down our forecast for the price of Omani crude in response to the sharp drop in global prices in both spot and futures markets in recent weeks. We now expect Omani crude oil to average approximately US$80 per barrel in 2015-2017 compared with a slow decline to US$95 per barrel in 2017 in our previous forecast. This has a negative impact on our assessment of Oman's fiscal and external position given the country's high dependence on revenues from hydrocarbons and oil in particular.
S&P said it views Oman's institutional and governance strength as moderate in a global comparison and weaker than many similarly rated peers. 'The country performs well on most measures of the World Bank's World Governance Indicators ranking above the 60th percentile for government effectiveness stability rule of law and control of corruption.
'Under the rule of His Majesty Sultan Qaboos bin Said who came to power in 1970 the country has seen a dramatic improvement in human development. From being one of the least-developed countries in the world Oman now ranks in the 70th percentile of countries in the United Nations Development Program's Human Development Index. Although in large part a consequence of the advent of significant hydrocarbon receipts during this period we think this improvement is also a result of effective policymaking.'
S&P added 'We estimate per capita GDP at US$21500 in 2014. Although overall real GDP growth has been strong -boosted by steady expansion in Oman's oil production since 2007 and large infrastructure and development investments - our estimate of Oman's weighted-average ten-year real per-capita GDP growth rate is significantly below that of peers with similar GDP per capita. This reflects the boost to population growth from both the high birth rate in Oman (estimated in 2012 at 2.9 births per woman on average) and the high inflow of foreign workers (immigrants accounted for 44 per cent of the population at midyear 2014). Should Oman's per-capita growth rate remain weak or deteriorate further this could lead us to reassess the level of economic risk in the country.'
The economy is expected to continue depending heavily on oil which accounted for just under one-half of 2013 GDP although this was down slightly on its share of 2012 GDP. 'The sharp downward revision to our oil price outlook has led us to cut our real GDP growth forecast to an average of 3.6 per cent a year in 2014-2017 compared with four per cent forecast in June. Given this and our expectations for population growth we project broadly stagnant real GDP per capita over this period.'
The ratings agency expects investment in the oil sector to drop in line with lower prices as most of Oman's fields are mature and require relatively costly investments to maintain output levels and to explore for new reserves. 'Nevertheless we expect modest progress to be made toward economic diversification. Investment in transport infrastructure petrochemicals and development of the Khazzan tight gas field will help drive economic activity in the next three years.
'Sizable oil receipts in recent years have helped maintain Oman's strong external position. However lower oil prices have led us to forecast a weaker trajectory for the current account balance in 2014-2017. We now expect the traditional current account surplus which was equivalent to over ten per cent of GDP in 2012 to turn to a small deficit in 2017 equivalent to 0.2 per cent of GDP as oil receipts drop and demand for imports of capital goods remains high.'
Oman's net external creditor position - as measured by liquid external assets minus external debt - will remain strong S&P said adding 'but we expect it to decline as a percentage of current account receipts (CARs) from 62 per cent in 2014 to just over 56 per cent in 2017. Meanwhile we expect the country's gross external financing requirements to rise gently from 95 per cent of CARs and usable reserves in 2014 to just over 100 per cent in 2017. We expect net inflows of foreign direct investment to pick up to the equivalent of one per cent of GDP which will help finance major projects such as the Duqm port and petrochemicals complex and the Khazzan gas project.
'Expansion in recurrent public spending since 2011 has contributed to a steep narrowing in the general government surplus from seven per cent of GDP in 2011 to an estimated 2.8 per cent in 2014 (including transfers to reserve funds and investment income). We now anticipate slightly more substantial cuts than previously given the lower oil revenue outlook but still view the government's room for manoeuvre as limited given that nearly 50 per cent of spending relates to public-sector wages and subsidies and exemptions which are typically hard to cut. We expect some drops in outlays on subsidies as well as postponement of some defence spending and lower-priority capital expenditures. But on balance we now expect the surplus to turn to small deficits averaging just under one per cent of GDP in 2014-2017 given the outlook for lower oil prices and receipts which account for nearly 90 per cent of government revenues.'
S&P added that it expects the government to finance these small deficits largely by liquidating some of its assets although it may issue a Eurobond or sukuk in 2015 (partly to set a benchmark for corporate issuance). 'Our base case is that gross government debt levels will stay broadly steady as a percentage of GDP in 2014-2017. The government's large net asset position which we estimate at equivalent to 76 per cent of GDP in 2014 provides strong fiscal flexibility even at a time of weaker oil prices.'
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