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Oman: Fiscal reforms and higher oil prices trigger ratings outlook change

Khatija Haque - Head of Research & Chief Economist
Shady Elborno - Head of Macro Strategy
Published Date: 13 October 2021


The Omani economy contracted 2.8% last year, according to IMF estimates (official data is not yet available) but we expect growth to rebound to a 2.4% this year as Covid-19 vaccine rollouts support domestic activity and external demand picks up. We expect the economic recovery will be led by 2.5% growth in non-oil activity, compared with a 3.9% contraction in 2020.  Oil output will also likely increase next year, contributing positively to headline GDP.

Fiscal conditions expected to improve

Higher oil prices and continued implementation of structural reforms, including the introduction of VAT this year should help to reduce the budget deficit sharply. Data for the year to August show the budget recorded a deficit of OMR1.1bn, almost half the OMR 2.0bn deficit recorded in the same period last year.  Higher oil prices and increased oil production in H2 21 should limit significant further widening of the budget deficit.  We expect the annual deficit to shrink to -4.9% of GDP this year from -15.7% of GDP in 2020.

Oman is working on Medium-Term Fiscal Balance Program to control expenditures, lower debt and reduce dependency of revenue on hydrocarbon revenues. The government aims to achieve a balanced budget by 2025 by reducing subsidies on utilities, rationalising capital spending and introducing an income tax on high earners from 2023. 

Oman: Budget deficit to narrow sharply in 2021

Source: Haver Analytics, Emirates NBD Research

S&P Revises outlook to stable

As a result of the planned reforms and improved fiscal dynamics, ratings agency S&P revised its outlook on Oman to positive from stable in October.  The ratings agency affirmed Oman's 'B+/B' long- and short-term foreign and local currency sovereign credit ratings. S&P expects the fiscal deficit to decrease to 4.2% of GDP this year, but the ratings agency is concerned about the possibility that lower oil prices from 2023 could result in a worsening fiscal trajectory despite planned reforms, and it expects total funding needs (fiscal deficit + maturing debt) will remain high, averaging about 12% of GDP through 2024. Oman's debt as share of GDP hit nearly 80% last year from little more than 5% in 2015, according to S&P estimates.