190306 oman duqm
Oman’s Duqm port. The Gulf country is expected to tap debt markets despite betting on privatisation to help partly support funding requirements. Image Credit: Gulf News Archives

Dubai: Moody’s cut Oman’s credit rating to junk, saying its outlook for the rating was negative and citing fiscal challenges in an environment of moderate oil prices.

Oman’s state coffers have been hit hard by a slump in oil prices in recent years, resulting in a wide budget deficit that it has struggled to tame.

Both Fitch and S&P have also cut Oman’s rating to junk over the past two years.

Oman’s bond yields were up early on Wednesday, by around 8 basis points on short- and medium-term paper, though the move was more subdued on the long-end of the curve.

“The market needs to see some signs from Oman to give it confidence that it’s going to tackle the large fiscal deficit,” said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“We believe that Oman will still be able to access international debt over our outlook period, though access could be impeded in the medium term if reforms to narrow its twin deficits are not implemented,” she added.

Malik said recent reported comments by an Omani official that privatisation will help partly support funding requirements this year sounded “optimistic,” and the country will likely have to tap the debt market.

Moody’s downgraded the long-term issuer and senior unsecured bond ratings of Oman to Ba1 from Baa3, it said in a statement late on Tuesday. Baa3 is Moody’s lowest investment-grade rating.

“The key driver of the downgrade is Moody’s expectation that the scope for fiscal consolidation will remain more significantly constrained by the government’s economic and social stability objectives than it had previously assessed,” the rating agency said.

Moody’s said Oman could face external vulnerability as wide fiscal deficits will contribute to wide current account deficits, perpetuating Oman’s dependence on steady inflows of external financing.

It said the negative outlook reflects the risk that “foreign investors’ willingness to finance Oman’s large deficits at relatively low costs could weaken, exacerbating the sovereign’s external vulnerability and raising government liquidity pressures.”

Jean-Paul Pigat, head of research at Lighthouse Research, said any concerns over financial market stability should be balanced against the high likelihood of receiving financial support from the rest of the Gulf countries.

Bahrain last year secured $10 billion in Gulf aid pledges and has promised to implement fiscal reforms.

Oman raised $8 billion in international bond sales last year, covering the three billion rial ($7.79 billion; Dh28.54 billion) deficit projected in its 2018 state budget.

A recovery in oil prices last year, however, narrowed the budget deficit by 43 per cent to 1.87 billion rials during January to November.