"We expect Oman's fiscal deficits to widen from 2015 onwards as hydrocarbon-related government revenues drop by more than 40 per cent this year. However Oman's low government indebtedness - at around five per cent of GDP in 2014 - gives it room to increase debt issuance to finance budget deficits" said Steffen Dyck a senior analyst at Moody's.

In February Moody's had affirmed Oman's A1 government bond rating and changed the outlook to negative from stable.

Moody's projects that Oman will report substantial fiscal deficits in 2015 and 2016 at around 12 per cent of GDP as government revenues will be negatively impacted by lower oil prices.

Moody's estimates Oman's fiscal breakeven oil price - the price of oil at which the budget can be balanced - at US$105 per barrel in 2015. This is high compared to its peers and almost double Moody's base case projection of US$55 per barrel for Brent in the same year and US$57 per barrel in 2016 suggesting fiscal deterioration if oil prices remain subdued.

The ratings agency forecasts that Oman's GDP growth will slow to around three per cent over 2015-16 down from the 4.9 per cent average between 2005-14 owing to pressure on the oil and gas sector. The latter accounted for 48 per cent of nominal GDP on average between 2005-14.

According to Moody's Oman's high levels of current government spending are not sustainable under a multi-year low oil price scenario.

However Moody's noted that Oman has sizeable financial buffers which the ratings agency estimates at 82 per cent of 2014 GDP.

In addition Oman's high domestic savings and healthy banking sector will continue to provide stable funding for the government says Moody's. As a result liquidity risk is unlikely to significantly affect government debt sustainability.

The ratings agency said given the negative outlook an upward movement in Oman's rating is highly unlikely.

'However containing government fiscal deficits and debt and progress in diversifying the economy and government finance from oil could stabilize the outlook. Conversely downward rating pressures will increase if diversification efforts slow and/or government finances deteriorate faster than in our baseline scenario including significant rise in the wider public sector debt and increased risks of contingent liabilities crystallising on the general government's balance sheet' Moody's said.

Moody's notes that regional geopolitical events pose low-probability but high-impact risks for Oman. However these risks are to some degree mitigated by Oman's position as a neutral mediating nation in the region as well as its close relations with major global powers.