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���������ֳ� - Hong Kong - 24 May 2024: ���������ֳ� has affirmed Oman's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB+' with a Stable Outlook.

A full list of rating actions is at the end of this rating action commentary.

Key Rating Drivers

Rating Strengths and Weaknesses: Oman's ratings are supported by higher GDP per capita and World Bank Governance Indicators than peer group medians, the positive impact of recent budget reforms and decreasing government debt/GDP. High dependence on oil revenue, modest financial buffers given high exposure to volatile hydrocarbon prices, and Oman's net external debtor position weigh on the ratings. We anticipate Oman will retain a focus on improving its non-oil fiscal balance, although the record is short.

Budget Surpluses Continue: We project Oman's budget surplus to narrow to 2.2% of GDP in 2024 and 0.9% in 2025 from 3.2% in 2023, assuming a Brent oil price of USD80 and USD70 per barrel, respectively. We estimate Oman's fiscal breakeven Brent oil price at USD65-70 per barrel. ���������ֳ� assumes OPEC+ will unwind production quotas from 4Q24, which will mitigate part of the revenue loss from lower oil prices for Oman, although overall hydrocarbon revenue will still drop by 11% in 2025. Our fiscal balance metric differs from the government, as we exclude some proceeds from assets sales, liquidity and debt management items from revenue and spending.

Moderate Impact of Fiscal Measures: The authorities continue to improve tax enforcement while streamlining taxes and fees, resulting in moderate growth of non-oil revenue. Oman is making progress towards personal income tax, which could bring a small amount of additional revenue from 2026. We project non-oil revenue to reach 10.6% of GDP at end-2024, up from 9.7% in 2019. There are currently no plans to increase VAT, although the measure could be revived in a low oil prices scenario.

On the spending side, Oman's extension of the social safety net came into force in 2024 at a cost of 1.3% of GDP, with the majority of funds going to old age and child support. This permanent increase in social transfers will be partly financed by lower spending on fuel subsidies as oil prices fall from 2025 (0.7% of GDP saving). The reform of electricity subsidies is slowly continuing, driven by rising technical efficiency and reorganisation of the sector.

Falling Debt: We project government debt/GDP will fall to 32.4% of GDP at end-2024 and 31.9% in 2025 from 36.5% at end-2023 and 68% in 2020. Oman continues to pre-pay some of its debt, using the budget surplus from high oil prices. We expect Oman to have repaid nearly USD2.9 billion in external debt in 1H24. The resulting 10% drop in external debt from end-2023 is faster than our forecast at our last review in September 2023.

The Petroleum Reserve Fund was about USD3 billion (2.6% of GDP) in April 2024. Oman's debt management has smoothed the debt profile, reducing the risk of liquidity pressures. The authorities aim to gradually increase the share of domestic debt by developing the local market and refinancing part of the upcoming external debt maturities in rial.

External Balance Sheet Improving: External debt repayments by government and state-owned entities (SOEs) have assuaged liquidity risks and Oman has returned to a positive sovereign net foreign assets position (Oman Investment Authority (OIA) foreign assets + FX reserves - government debt) in 2023 (5.4% of GDP), from -9% of GDP in 2020. While the overall economy remains a net debtor, this highlights greater resilience of Oman's external debt in our base case scenario of a Brent oil price of USD65 per barrel in the medium term.

Net External Debt Relatively High: SOEs have helped improve Oman's external position, with OQ, Oman Telecommunication Company and Asyad Group significantly reducing debt in 2022 and 2023. We project overall SOE debt to be broadly stable at about 40% of GDP, including 17% of GDP in external debt, with Energy Development Oman increasing its debt to develop its assets, while most other large SOE reduce debt and asset sales generate internal funding. OIA foreign assets increased to close to USD19.8 billion (18% of GDP). We project total net external debt will stabilise around 20% of GDP over 2024-26, above the 'BB' median of 15% and 'BBB' median of 2%, but materially lower than recently.

External Vulnerability Improving: We forecast sovereign external maturities to average USD3.1 billion in 2025-2027. In addition, annual external debt payments by SOEs under the OIA's remit will average USD1.6 billion in 2025-2027. These external commitments are less burdensome than in recent years. As oil prices fall, we expect Oman to gradually roll over a greater share of upcoming maturities. We project central bank foreign exchange reserves to continue to cover about 3.5 months of current account spending over 2024-2026, despite our projected fall in oil prices.

Growth to Bounce Back: We project overall GDP growth of 1.8% in 2024, after 1.3% in 2023, supported by non-oil growth of 2.7% in 2024, driven by greater domestic consumption, robust foreign investment, tourism and downstream hydrocarbon. Hydrocarbon GDP will contract slightly in 2024 under the effect of OPEC+ quotas. The authorities expect non-oil growth to pick up to 3.9% in 2025, but ���������ֳ� projects only 2.8%, assuming a substantial import content of additional domestic demand generated by the widening of the social benefits and more moderate growth in FDI, although risks are tilted towards faster growth. Green hydrogen projects remain in the study phase and no final investment decisions have been made.

ESG - Governance: Oman has an ESG Relevance Score (RS) of '5[+]' for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Oman has a medium WBGI ranking at the 54th percentile, reflecting strong scores for rule of law and regulatory quality, but a low score for voice and accountability.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

-Public Finances: An upward trend in government debt/GDP; for example, stemming from a loosening of the fiscal stance, or lower-than-expected oil prices.

- External Finances: Deterioration of Oman's external balance sheet, for example, in the form of a decline in central bank reserves and OIA assets.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

- Public Finances: A strengthening in the government's balance sheet and greater confidence that Oman will continue to improve its non-oil budget balance; for example, through a sustained period of high oil revenue or the introduction of new fiscal consolidation measures.

- External Finances: A continued decline in net external debt/GDP, for example reflecting lower SOE external debt or an accumulation of foreign assets.

- Macro: Growth of the non-oil economy that notably improves non-oil fiscal revenues and reducing social spending pressures on the government.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

���������ֳ�'s proprietary SRM assigns Oman a score equivalent to a rating of 'BBB' on the Long-Term Foreign-Currency (LT FC) IDR scale.

���������ֳ�'s sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to SRM data and output, as follows:

- Public Finances: -1 notch to reflect risks to government finances from high dependence on hydrocarbon revenue and other fiscal rigidities related, for example, to subsidies and wages.

- External Finances: -1 notch to reflect vulnerability to renewed oil moves not fully captured in the model and Oman's large net external debtor position, which is well above the 'BB' median.

���������ֳ�'s SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. ���������ֳ�'s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

Country Ceiling

The Country Ceiling for Oman is 'BBB-',1 notch above the LT FC IDR. This reflects moderate constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments.

���������ֳ�'s Country Ceiling Model produced a starting point uplift of +1 notch above the IDR. ���������ֳ�'s rating committee did not apply a qualitative adjustment to the model result.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Oman has an ESG Relevance Score of '5[+]' for Political Stability and Rights as WBGIs have the highest weight in ���������ֳ�'s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Oman has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Oman has an ESG Relevance Score of '5[+]' for Rule of Law, Institutional & Regulatory Quality and Control of Corruption, as the WBGIs have the highest weight in ���������ֳ�'s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Oman has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Oman has an ESG Relevance Score of '4' for Human Rights and Political Freedoms, as the Voice and Accountability pillar of the WBGIs is relevant to the rating and a rating driver. As Oman has a percentile rank below 50 for the respective Governance Indicator, this has a negative impact on the credit profile.

Oman has an ESG Relevance Score of '4[+]' for Creditor Rights, as willingness to service and repay debt is relevant to the rating and is a rating driver for Oman, as for all sovereigns. Oman has a 20-plus year record without a restructuring of public debt. This is captured in our SRM variable and has a positive impact on the credit profile.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ���������ֳ�'s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ���������ֳ�'s ESG Relevance Scores, visit .

Additional information is available on

APPLICABLE MODELS

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Country Ceiling Model, v2.0.1 (1)
• Debt Dynamics Model, v1.3.2 (1)
• Macro-Prudential Indicator Model, v1.5.0 (1)
• Sovereign Rating Model, v3.14.1 (1)

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