DUBAI: Fitch downgraded Oman's credit rating to "junk" on Tuesday, citing fiscal challenges to the oil producer from volatile crude prices, leaving only Moody's Investors Service to rate it as an investment grade credit.
Oman's state coffers have been hit hard by a slump in oil prices in recent years, resulting in a wide budget deficit that the country is only slowly managing to tame.
A recent surge in the country's government bond yields has made it the weakest debt market link among Gulf oil exporters.
Fitch downgraded Oman to BB+ from BBB-(minus) with a stable outlook, saying the outlook for oil production, prices and oil revenues filling the government's budget is "highly uncertain".
Oman's dollar-denominated government bonds fell after Fitch's decision. Its bonds due in 2023 fell 1.5 cents on the dollar, while its 2021 bonds dropped almost 1 cent.
The downgrade comes after a renewed fall in energy prices - oil prices slumped on Tuesday with the North Sea Brent crude falling 4.0 percent to $57.20, a 14-month low.
Oman is the most sensitive country in the region to oil prices, so even a small decrease in prices can mean "pretty significant headwinds", said Mohieddine Kronfol, chief investment officer for global sukuk and MENA fixed income at Franklin Templeton Investments.
S&P rates Oman BB. Although Moody's maintains an investment-grade rating on the country, it is only one notch above junk status with a negative outlook - meaning that a downgrade is likely.
"Oman has some time to address fiscal challenges but odds are increasing that they'll lose their investment grade status probably in 2019-2020," Kronfol said.
Oman raised $8 billion in international bond sales this year, covering the three billion rial ($7.79 billion) deficit projected in its 2018 state budget.
"We expect government debt to continue on an upward trend well into the 2020s, reaching 58 percent of GDP by 2020, from 48 percent of GDP in 2018," said Fitch, which expects gross foreign debt issuance of around $5 billion per year in 2019 and 2020.
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