Richard Melson

February 2005

Capital Intelligence

23 February 2005

PRESS RELEASE

Oman's Sovereign Ratings Raised

Capital Intelligence, the international emerging markets rating agency, today announced that it has raised Oman's long-term and short-term foreign currency ratings by one notch to BBB+ and A2, respectively. The rating agency also raised Oman's long-term local currency rating, to A- from BBB+, and affirmed the short-term local-currency rating at A2. The outlook is stable.

The upgrade rewards a prolonged period of fiscal prudence and reflects CI's expectation that the government debt burden will remain low and the external finances will remain comfortable for the foreseeable future. In addition, medium-term growth prospects for the non-oil economy have improved due to ongoing investment in industrial diversification projects.

Macroeconomic performance has been reasonably strong in recent years as evidenced by robust non-hydrocarbon GDP growth (averaging around 6.5% annually in 2000-04), low inflation, and moderate fiscal and external current account surpluses. Economic activity has expanded briskly, underpinned by increased investment in infrastructure and industry and supported by high oil prices. The medium-term economic outlook is bright. The development of gas-intensive, export-oriented industries has gained momentum after several years of discussion, and petrochemical, fertiliser, aluminium, and iron and steel projects are all expected to commence operations in 2005-08. Oman is also seeking to expand liquefied natural gas (LNG) production and the construction of a third liquefaction train could begin later this year.

Sound public and external finances are central to Oman's credit ratings. The central government budget (including oil income transferred to the country's reserve fund) has been in surplus since 1999. The budget surplus is estimated to have reached around 6% of GDP in 2004 and is projected to decline to about 3.8% in 2005 owing to a reduction in the volume of crude oil for export and high government investment spending. The government has utilised budget surpluses to accumulate external financial assets – both for future generations and to act as a buffer against oil or other economic shocks – and to reduce its external debt. The ratio of government debt to GDP has trended downwards over the past decade, falling from 29% in 1998 to 16% in 2002 and an estimated 11% in 2004. The country's gross external debt is also low, at around 21% of GDP (37% of current account receipts) in 2004 while indicators of reserve adequacy suggest that the central bank's foreign reserves would provide a comfortable cushion against any external shocks occurring in the near term. Official reserve coverage of external debt falling due in 2005 is estimated at 195%. In addition, in the event of severe external pressures the government could draw on the foreign assets of the State General Reserve Fund (SGRF) – which are believed to be at least twice as large as official reserves.

These credit strengths are partially offset by Oman's excessive dependence on oil. The commodity directly contributes over 40% of national output and accounts for around 75% of budget revenues and 68% of exports of goods and services. Consequently, national output growth, government cashflow, and foreign exchange earnings are all vulnerable to volatile oil prices. Oil dependence is risky, not just because of price volatility but also because production is falling due to the complex geology of Oman's ageing oil fields. Petroleum Development Oman (PDO), which is 60% government owned, expects investment in enhanced oil recovery schemes to result in the arrest and partial reversal of the output decline over the next five years. Stemming the decline would offer important support to Oman's ratings.

Contact:

Anthony Cooke Tel: 357 2534 2300 anthony.cooke@ciratings.com

Karti Inamdar Tel: 91 124501 2142 karti.inamdar@ciratings.com

OMAN'S SOVEREIGN RATINGS RAISED

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Teresa Andreou

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Wed, 23 Feb 2005