[Oman-L] Oman's economy (rating by Capital Intelligence)

[Joachim Duester]

Oman's sovereign ratings raised, credit outlook stable
  
Oman Daily Observer - 24 April, 2008

Capital Intelligence (CI), an international credit
rating agency, announced yesterday that it has raised
Oman's long-term foreign currency rating to 'A' from
'A-' and its short-term foreign currency rating to A1
from A2 in response to a further strengthening of the
country's external balance sheet and the steady growth
of per capita income.

Oman's ratings also reflect the very low level of
government debt, the robustness of the public finances
to oil price and other external economic shocks and
the authorities' track record of prudent economic
management.

The credit outlook for Oman is stable. Oman's economy
continued to grow strongly in 2007, supported by high
oil prices, expansionary economic policies, and
increased confidence in future growth prospects.
Nominal GDP increased by about 13 per cent, taking GDP
per capita to just over $ 15,000 — approximately 90
per cent higher than in 2002. Real GDP is estimated by
CI to have expanded by 7.9 per cent, up from 7.2 per
cent in 2006.

The short- to medium-term outlook for the economy is
favourable, based on current expectations of high but
gradually declining world energy prices, and ongoing
and planned investment to boost oil and gas capacity,
improve physical and social infrastructure, and
diversify the economy. CI expects real GDP growth to
average around 7 per cent annually in 2008-2010 and
GDP per capita (in nominal terms) to approach $ 20,000
by the end of the period. Helped by high oil prices
and the expansion of the liquefied natural gas (LNG)
industry, the current account of the balance of
payments has recorded relatively large surpluses over
the past eight years and is expected to remain in
surplus in 2008-2010.

Current account surpluses have translated into a
strong external balance sheet, which in turn mitigates
the economic and financial risks associated with
external shocks. CI estimates that the combined
foreign financial assets of the official and
commercial banking sectors exceeded gross external
debt by about 48 per cent of GDP at the end of 2007
and projects an increase in the net external asset
position to 74 per cent of GDP by 2010. Central bank
foreign exchange reserves of $ 9.5 billion (23 per
cent of GDP) at end-2007 provide solid backing for the
fixed exchange rate regime and a strong buffer against
external shocks. In the event of severe external
pressures, the authorities could draw on the
government's foreign assets, which CI estimates to be
almost twice as large as the Central bank reserves.

The public finances are also sound. The government
budget, including CI estimates of transfers to
government reserve funds, has posted surpluses in each
year since 1996, with the exception of 1998. The
budget surplus is estimated by CI to have been around
13 per cent of GDP in 2007 and is projected to
increase to about 16.5 per cent in 2008 in response to
the first increase in oil production in seven years
and sharply higher oil prices. The government debt is
very low, at an estimated 6 per cent of GDP at
end-2007, and is covered roughly nine-fold by
government financial assets (excluding equity stakes).

Oman's ratings continue to be constrained by the
country's over-reliance on oil and gas and the
challenge of expanding the private sector to absorb a
fast growing labour force. Oman's oil dependence is
problematic, not only because oil prices tend to be
volatile and can generate cash flow shocks, but also
because the country's proven reserves are modest in
size and hard to extract owing to the geological
complexity of ageing fields. Annual oil production
declined steadily between 2001 and 2007, and output in
2008 is expected to be around 20 per cent lower than
the peak reached in 2000. The authorities are hopeful
that the decline in output will be partially reversed
over the medium term, though production is expected to
become increasingly dependent on the use of costly
enhanced oil recovery (EOR) schemes.