Oman's debt buyback transaction supports improving metrics

DUBAI (S&P Global Ratings) -- S&P Global Ratings said today that it believes Oman's (BB-/Stable/B) recent liability management exercise will help reduce the government's debt levels, generate interest cost savings, and smoothen its maturity profile.

On June 30, Oman completed a voluntary debt buyback transaction totaling $701 million across Eurobonds maturing in 2025, 2026, 2027, 2028, 2029, 2031, and 2032. According to official calculations, this will result in cumulative interest cost savings to maturity of $232 million. We expect gross government debt will fall to 48% of GDP by year-end 2022, compared with 63% in 2021 and a peak of 70% in 2020 (see chart)

Following several years of deteriorating public finances and external accounts until 2020, Oman is now benefitting from higher oil prices and fiscal and governance reforms. Realized Omani crude oil prices have averaged about $95 per barrel (/bbl) so far this year, relative to $61/bbl over 2021. We assume Brent oil prices of $100/bbl over the rest of 2022, falling to $85/bbl in 2023 and $55/bbl from 2024 (see "S&P Global Ratings Raises Oil And Natural Gas Price Assumptions On Further Market Price Step-Ups," published June 8, 2022, on RatingsDirect). Despite some measures to diversify revenue, gross oil receipts comprised about 80% of total government revenue in 2021. We expect favorable oil market dynamics will allow the government to deliver a fiscal surplus of 6.5% of GDP in 2022, following deficits averaging nearly 10% of GDP over 2015-2021. (Unlike official fiscal accounts that net out transfers to the Petroleum Reserve Fund, we incorporate gross hydrocarbon receipts in revenue).

The government intends to largely allocate the fiscal surplus toward higher spending on development projects and reducing government debt. It has also introduced other measures to support economic activity and reduce the effects of past austerity on the population. These include value-added tax exemptions on 488 items from 93 previously, a more gradual reduction in electricity subsidies, reduced work visa fees for expatriates, and lower municipality and services fees.

However, since we expect oil prices to drop again in the medium term, fiscal pressures could re-emerge if progress on fiscal reforms stalls and the government increases current spending significantly. We forecast that a return to fiscal deficits (due to lower oil prices) and fall in nominal GDP will lead to an increase in debt as a proportion of GDP in 2024-2025 (albeit to levels lower than in 2021). In addition, rising interest rates and weaker global growth could weigh on the government's borrowing costs and non-oil sector growth prospects in Oman. Nonetheless, we believe that the government's proactive debt management measures this year, along with liquid assets of about 50% of GDP, should help ease future refinancing risks.

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