Research Update:

Ratings On Oman Affirmed At 'A/A-1' On Strong Fiscal And External Positions; Outlook Stable
Primary Credit Analyst: Dima B Jardaneh, Dubai (971) 4-372-7154; dima.jardaneh@standardandpoors.com Secondary Contact: Trevor Cullinan, Dubai (971) 4372-7113; trevor.cullinan@standardandpoors.com Analytical Group Contact: SovereignEurope; SovereignEurope@standardandpoors.com

Table Of Contents
Overview Rating Action Rationale Outlook Key Statistics Related Criteria And Research Ratings List

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Research Update:

Ratings On Oman Affirmed At 'A/A-1' On Strong Fiscal And External Positions; Outlook Stable
Overview
We believe that Oman's strong fiscal and external surpluses are sufficient to support its economy and withstand external shocks. We are affirming our long- and short-term sovereign credit ratings on Oman at 'A/A-1'. The stable outlook balances Oman's strong fiscal and external position against risks from structural and institutional weaknesses, which could derail policymaking; a difficult demographic profile that could challenge economic policy; and limited monetary policy flexibility.

Rating Action
On June 21, 2013, Standard & Poor's Ratings Services affirmed its 'A/A-1' long- and short-term foreign and local currency sovereign credit ratings on the Sultanate of Oman. The outlook is stable. The transfer and convertibility (T&C) assessment remains 'AA-'.

Rationale
The ratings are supported by Oman's strong net external and general government asset positions and prudent investment policies. They are constrained by our view of its heavy dependence on hydrocarbons and its challenging demographic profile: nearly 60% of the population is under 25 (mid-2011 official estimate). It is also subject to geopolitical risk, similar to other sovereigns in the Gulf Cooperation Council. This is somewhat mitigated by the country's strong alliances with international powers, as well as its ability to maintain a neutral and independent stance in the region. Policy setting and direction largely hinges on the Sultan himself. In our view, this places the effectiveness and predictability of policymaking at risk. Political institutions are at a nascent stage of development relative to nonregional peers rated in the 'A' category. While the Sultan has taken some measures to expand political participation, the system remains highly centralized, with limited accountability of institutions. Moreover, uncertainty over succession also poses political risks, in our view. Oman's economy is performing well. We expect real GDP growth to reach 5% this year, underpinned by an increase in oil production to an average of 0.94 million barrels per day (bpd) from 0.92 million bpd in 2012. We also believe growth in the non-oil economy will remain robust on high investment and public

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Research Update: Ratings On Oman Affirmed At 'A/A-1' On Strong Fiscal And External Positions; Outlook Stable

and private consumption. We estimate real per capita GDP at $21,600 in 2012. Oman's annual average real GDP per capita growth of about 1% during 2006-2016 is low compared with peers. We attribute this low trend largely to Oman's fast population growth: 4.5% on average during 2005-2011. We note, however, that reported population figures might not be accurate. They have also fluctuated greatly in recent years, which could distort GDP per capita data. Oman attracts a large number of foreign workers who accounted for 86.5% of private sector employment (2011 official estimate); expatriates also accounted for 39% of the total population (mid-2011 estimate). The government continued to build on its fiscal buffer last year. Fiscal stimulus notwithstanding, the government posted a fiscal surplus that we estimate at 3.3% of GDP. Preliminary fiscal data indicate that government spending reached 43% of GDP last year, from 40% in 2011. We expect a larger surplus this year (4.2% of GDP) as the impact of one-off measures from 2011-2012 tapers off. We also base this estimate on Oman's 2013 oil export price remaining unchanged from last year at $110 per barrel. A risk to the government's fiscal performance is its reliance on volatile hydrocarbon revenue: 88% of total revenues in 2012. However, the government's large stock of liquid assets--at more than 25% of GDP--mitigates this risk. In our view, the government is becoming increasingly reliant on oil prices remaining high. Its initiative to expand public sector employment to generate jobs for Omanis, as well as its increased spending on benefits and social welfare and its large investment program, has increased this dependency. If oil prices were to drop, we believe that some of this spending would be difficult to curb. We note, however, that if government revenues fell short of spending needs over 2014-2015 it could draw down on previous surpluses. We view as likely the government continuing to issue bonds in domestic currency to help develop the domestic debt capital market. We expect the general government debt to expand by about 1% of GDP annually during 2013-2015. The large oil windfall in recent years has helped further strengthen Oman's external position. We estimate that the current account surplus reached 12.8% of GDP in 2012, and we believe this will continue this year at 11.3%. Oman is in a strong net creditor position; we estimate its narrow net external assets will average 89% of current account receipts (CARs) in 2013-2015. Similarly, the country's external liquidity position is ample with gross external financing needs at about 81% of CARs and usable reserves during 2013-2015. Notwithstanding its external flexibility, monetary policy is limited in Oman by the peg of the Omani rial to the U.S. dollar. Furthermore, the transmission of monetary policy is constrained by an underdeveloped local capital market.

Outlook
The stable outlook balances Oman's strong fiscal and external position--which provides a more-than-ample buffer to withstand external shocks--against risks

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Research Update: Ratings On Oman Affirmed At 'A/A-1' On Strong Fiscal And External Positions; Outlook Stable

from structural and institutional weaknesses, which could derail policymaking; a difficult demographic profile that could challenge economic policy; and limited monetary policy flexibility. We could consider lowering the ratings if the pace of economic growth, diversification, and structural reform is not sufficient to increase per capita real GDP growth to a pace comparable to peers. Downward pressure on the ratings could also build from a protracted weakening in fiscal performance, for example as a result of continued increases in spending on the public-sector wage bill, which could lead to an increase in government debt and a fast drawdown of government assets. We could consider an upgrade if the underpinnings of economic growth strengthen, raising per capita income levels and addressing social challenges, including unemployment.

Key Statistics
Table

Sultanate of Oman - Selected Indicators

2006 GDP per capita ($) Real GDP (% change) Real GDP per capita (% change) General government balance (% of GDP) General government debt (% of GDP) Net general government debt (% of GDP) General government interest exp. (% of revenues) Domestic credit to private sector & NFPEs* (% of GDP) Consumer price index (average; % change) Gross ext. financing needs* (% of CARs and usable reserves) Current account balance (% of GDP) Narrow net external debt (% of CARs) 14,282 5.5 2.7 13.8 8.8 (41.4) 2007 15,276 6.7 0.3 11.1 6.2 (53.3) 2008 21,187 13.2 8.3 13.7 4.1 (49.7) 2009 15,199 3.3 (6.7) (1.1) 5.4 (68.6) 2010 21,209 5.6 20.9 4.3 5.0 (67.5) 2011 21,236 4.5 (12.1) 7.2 4.6 (69.4) 2012 21,610 6.0 (3.6) 3.3 5.1 (68.5) 2013e 22,712 5.0 1.0 4.2 5.5 (69.3) 2014f 23,075 4.0 0.0 (0.5) 6.0 (66.7) 2015f 23,306 4.0 0.0 (2.4) 7.0 (62.2) Median A 22,289 2.7 1.5 (1.4) 39.2 20.5

0.8

1.0

0.5

0.6

0.4

0.3

0.3

0.3

0.4

0.4

6.3

32.5

39.8

39.3

52.4

48.6

47.5

49.0

51.6

55.6

59.3

69.0

3.3 77.8

5.0 97.3

12.8 90.5

5.6 101.0

3.2 85.2

4.1 79.1

2.9 79.5

3.0 81.1

3.0 79.0

3.0 81.8

2.5 90.9

15.4 (40.2)

5.9 (49.7)

8.3 (46.9)

(1.2) (73.3)

10.0 (70.1)

14.7 (69.1)

12.8 (73.8)

11.3 (83.9)

9.1 (90.4)

5.2 (93.8)

2.7 (11.5)

*Gross external financing needs are defined as current account outflows plus short-term debt by remaining maturity. Narrow net external debt is defined as the stock of foreign and local currency public and private sector borrowings from nonresidents (including nonresident deposits in resident banks) minus liquid nonequity external assets, which include official foreign exchange reserves, other liquid public sector foreign assets, and financial institutions' deposits with and lending to nonresidents. A negative number indicates net external lending. f--Forecast. e--Estimate. NFPEs--Nonfinancial public sector enterprises. CARs--Current account receipts.

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Research Update: Ratings On Oman Affirmed At 'A/A-1' On Strong Fiscal And External Positions; Outlook Stable

Related Criteria And Research

Sovereign Government Rating Methodology And Assumptions, June 30, 2011 Sovereign Defaults And Rating Transition Data, 2012 Update, March 29, 2013 Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see "Related Criteria And Research"). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook.

Ratings List
Ratings Affirmed Oman (Sultanate of) Sovereign Credit Rating Transfer & Convertibility Assessment Senior Unsecured Short-Term Debt

A/Stable/A-1 AAA A-1

Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.

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