Oman's oil industry under pressure, as sovereign credit rating takes a hit

Dubai — Cash-strapped Oman saw its credit worthiness take another hit June 24, putting further pressure on the country's lifeblood oil industry as it struggles with low prices and cratering demand for crude.

Ratings agency Moody's Investors Service cut Oman to Ba3, three levels into junk status, in its second downgrade of the country this year. The action matches S&P Global Ratings' downgrade of Oman in March to BB-, with a negative outlook.

The junk ratings will make it harder for the sultanate to find cash to support its economy and implement needed reforms to diversify from oil revenue reliance, just as it is gearing up to raise capital through a suite of loans, bonds and Islamic financing.

"The downgrade reflects the conclusion that in a lower oil price environment, which Moody's now assumes will persist into the medium term, the government 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," the agency said.

The coronavirus-related global recession and the slowdown in overall economic activity will dampen demand for oil, and the market will recover more slowly than overall GDP as activity in oil-intensive sectors remains restricted for some time, the statement said.

S&P Global Ratings said in reaffirming its March downgrade on April 17 that the Omani government's efforts to slash spending and implement structural reforms "could be insufficient to stem the rise in government debt, barring a substantial improvement" in oil prices. It further noted that it may need to rely on financial support from its GCC neighbors.

Supporting oil prices

Oman is a member of the OPEC+ coalition, which is in the midst of a landmark 9.7 million b/d production cut agreement intended to support the oil market through the COVID-19 pandemic. Though crude prices have seen a modest rally over the last few weeks, they remain far below levels most members -- including Oman -- need to balance their budgets.

The financial pressure has prompted Oman and other members to urge an extension of the cuts, which are scheduled to roll back in August, though the coalition for now is taking it month-to-month on any decisions.

In May, Oman said it would slash its budget by 10%, up from the 5% announced a few weeks previously. Sources told Platts that its oil and gas sector, however, had undergone a higher magnitude of cost-cutting.

Platts reported earlier this month that Oman was going to tap bond markets and Islamic financing, with the exact amount the sultanate is targeting to being determined via a series of meetings between government ministries and the Debt Management Office throughout June.

Oman's economy is already heavily burdened by debt and is one of the most exposed countries in the Gulf Cooperation Council to low oil prices. Hydrocarbons account for about 75% of the government's revenues.

But not all analysts are bearish on Oman's future.

The ongoing reforms – including the spending cuts - will help in arresting the negative credit developments as Oman imposes more spending discipline, said Ehsan Khoman, Japanese investment bank MUFG's head of Middle East and North Africa research and strategy, in a June 23 research note.

"We remain optimistic that the reform agenda – should it bear fruit – [will] not only boost Oman's potential growth rate over the long-term, but also to structurally transform the economy, with longstanding impediments to investment and productivity being reversed," said Ehsan Khoman, MUFG's head.