Fitch Ratings Agency reported on Tuesday that the Sultanate of Oman's budget for the current fiscal year signals that the authorities will continue repaying government debt. This helps bolster the state's resilience in the event of potential shocks.
However, Fitch noted that the trajectory of debt reduction in 2024 is expected to be tempered by an uptick in social spending.
“We now forecast the surplus to fall to 1.8% of GDP in 2024, from an estimated 3.3% in 2023, based on the budget data and our latest oil price assumptions. In our December sovereign data comparator, we had projected the surplus would remain broadly stable at 2.1% of GDP in 2024, from 2.2% in 2023,” said Fitch.
“The smaller surplus in 2024 will partly reflect a projected 1% drop in oil output, in line with the recent reduction of the country’s OPEC+ production quota, as well as a modest weakening in international oil prices, which will weigh on revenues.
The budget projects non-oil revenue growth to be driven by stronger economic activity, with no significant new revenue-raising measures being announced,” according to Fitch.
The overall effect on Oman’s credit metrics should be broadly in line with the assumptions we made when we upgraded the sovereign’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BB+' from 'BB', with a Stable Outlook, in September 2023.
The government plans to widen the social safety net, which will add about 1% of GDP to spending and was reflected in our assessments in September. Fuel subsidy costs will remain considerable, at about 0.7% of GDP in 2024, though we expect the government would scrap the subsidy should global energy prices fall.
The authorities also plan to keep public capex broadly stable in 2024.
“Overall, we expect spending to remain prudent, with key current expenditure items generally growing in line with nominal GDP.
The budget gives no indication of significant backtracking on recent fiscal consolidation measures, and we expect further modest progress on electricity price reform. Meanwhile, the public finances will benefit from slightly lower debt service costs in 2024 following liabilities management operations that the government has conducted since 2022.”
The government will use part of the surplus to continue debt repayment. Oman’s use of the revenue windfall from high oil prices to reduce debt and spread maturities was a driver of our decision to upgrade its ratings in September.
“However, we expect the pace of debt reduction to ease in 2024, with government debt/GDP falling to around 33% in 2024 from 36% in 2023. This will be driven not only by the smaller surplus, but also by the authorities’ plans to channel some of the surplus to Oman Future Fund to support economic development.”
The report concluded, "Economic diversification efforts will face significant hurdles and it will take time for us to assess their record. In the meantime, Oman’s public finances will remain vulnerable to global oil price shocks – albeit less than they were before the Covid-19 pandemic.
External debt maturities remain significant at USD6 billion per year for the government and state-owned enterprises combined, although less burdensome than in recent years.”
