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S&P: Sultanate of Oman ratings lowered to BBB-/A-3; outlook stable.

Standard & Poor's Ratings Services has lowered its long- and short-term foreign and local currency sovereign credit ratings on the Sultanate of Oman to 'BBB-/A-3' from 'BBB+/A-2'. The outlook is stable. At the same time, it revised the transfer and convertibility (T&C) assessment on Oman to 'BBB' from 'A-'.

S&P said, "In November 2015, we said we could lower the ratings on Oman if it appeared we had underestimated the likely negative impact of lower oil prices on the economy. We now project a more material deterioration in Oman's economic and fiscal outlook. We have therefore lowered our long-term ratings on Oman to 'BBB-'."

In Oman, the hydrocarbon sector accounted for just under half of GDP in 2014, slightly over half of exports, and three-quarters of government revenues. However, the hydrocarbon sector's contribution to the economy fell to about 35 per cent of GDP over the first half of 2015 following the pronounced decline in oil prices. Given the country's high dependence on this commodity, S&P has revised its forecasts for economic growth and the fiscal and external positions to incorporate the lower expected oil prices.

"Since our review last November, we have reduced our real GDP growth forecasts for Oman over 2016-2019 to an average of 1.4 per cent a year from about 3.0 per cent, while our GDP per capita estimate for 2016 has fallen to $14,600 compared with the $16,300 we had expected at our last review. We expect only a slow recovery to about $16,000 in 2019 (compared with over $20,000 in 2011-2014)."

"We estimate Oman's budget deficit at 13 per cent of GDP in 2016, in line with the government's own budget forecast. This compares with a deficit of close to 18 per cent of GDP in 2015."

"In our view, monetary policy flexibility is limited because the Omani rial is pegged to the U.S. dollar. That said, the peg has provided a stable nominal anchor for the economy, particularly as contracts for oil, the main export, are typically priced in dollars. Oman's real effective exchange rate has appreciated by 12 per cent since early 2014. In our view, this represents a deterioration in international competitiveness of the country's modest tradables sector, which is likely to dampen non-oil GDP growth, absent any offsetting factors, such as improved efficiency or technological capacity. The transmission of monetary policy is constrained by an underdeveloped local capital market, although we expect to see some growth in local debt and Sukuk issuance over the next four years. Nevertheless, we expect the peg to be maintained over the medium term."

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Publication:CPI Financial
Geographic Code:7OMAN
Date:Feb 21, 2016
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