Earlier this week, Moody’s downgraded Oman’s rating one credit notch to Ba3 (negative outlook) bringing it in line with S&P‘s BB- rating and a notch below Fitch’s BB rating. Moody’s expect a lower oil price environment over the medium term and have revised down their Brent crude forecasts to USD35 and USD45 for 2020 and 2021 respectively. In their opinion, the government of Oman “will unlikely be able to significantly offset the oil revenue loss and avoid a large and durable deterioration in its debt and debt affordability metrics or erosion of its fiscal and foreign currency buffers.”
Under Moody’s baseline scenario, they expect Oman’s fiscal deficit will increase from 7.6% of GDP in 2019 to more than 19% of GDP in 2020 and 15% of GDP in 2021. Reflecting this they expect “Oman's government debt to increase sharply to around 86% of GDP in 2021 from 59% of GDP in 2019. Government debt may stabilize around these levels thereafter, but is unlikely to fall significantly.” Their rating reflects Oman’s asset buffers, which they estimate at 23% of GDP, and “Moody's expectation that some of the higher-rated Gulf Cooperation Council (GCC) sovereigns would be willing and able to extend financial support to Oman should the sovereign's ability to access external financing remain constrained for an extended period.”
For us, the Oman sovereign does not currently screen particularly attractively, notably at the longer end of the curve: For example, Oman 6.5% 2047 trades (using Fitch’s BB best rating rather than Moody’s/S&P Ba3/BB- ratings) ~0.8 credit notches cheap. Broadly, aside from Pemex (rated BBB/Ba2/BB- by S&P/Moody’s/Fitch), we find that issues lower down the credit quality spectrum are not trading at sufficiently wide spreads, to warrant aggressively adding to weightings at current levels. We still see opportunities in credit markets, especially in Abu Dhabi and Qatar where the sovereign ratings look to be well underpinned by significant asset buffers against the backdrop of weaker energy prices, and we continue to favour portfolios with a bias to a still high quality weighted average rating.