Oman Banking Sector Outlook Slashed by Moody’s

The outlook for Oman’s banking sector was cut to negative by Moody’s Investors Service to reflect a reduction in the government’s ability to support the country’s banks, weaker economic growth and tightening liquidity.

“We expect a softening in Oman’s operating environment, with fiscal consolidation amid prolonged oil price weakness weighing on economic growth,” Moody’s analyst Mik Kabeya said in a statement on Tuesday. “This will weigh on the credit growth which Moody’s expects would fall to 5% in 2017 from 10.1% in 2016,” Bloomberg reported.

The change from stable comes after Moody’s last month cut the rating of the sultanate to the second-lowest investment grade, saying its progress toward addressing structural vulnerabilities to a weak oil price environment has been more limited than expected. Oman has a sub-investment grade status at S&P Global Ratings.

A halving of crude prices since 2014 left Oman with a budget gap of almost 22% of economic output in 2016, according to the International Monetary Fund. The country posted a deficit of two billion rials ($5.2 billion) in the first five months of the year, compared with 2.5 billion rials in the year-earlier period. Oman plans to raise about $2 billion through debt sales this year for its 2018 budgetary needs, people familiar with the matter said last month.

 Bond Issuance

“Funding and liquidity conditions will remain tight, as high domestic government borrowing limits funds available to lend to the wider economy,” Moody’s said. “However, the government’s international bond issuance, slower credit growth and higher oil prices will moderate the pressure.”

Slower economic growth will push problem loans to around 3% of gross loans this year and next, up from 2.1% at the end of March, Moody’s said. The high concentration of loans to single borrowers and to the real estate sector, are also a downside risk to asset quality.

Moody’s also expects bank profitability to decline slightly. Net interest margins are likely to remain stable at around 2.4% as higher lending rates offset increasing funding costs, while loan loss provisioning will increase as problem loans rise.

Oman in August signed an agreement for $3.5 billion in loans from Chinese financial institutions and in May raised $2 billion through an Islamic bond sale, which lured orders for more than three times the issue size.

Meanwhile, Oman is on the speedy path of economic diversification and the immense success of the Special Economic Zone of Duqm, as well as the Sohar and Salalah free zones, in attracting foreign direct investment is remarkable.