Iraq assigned 'B-/B' foreign and local currency sovereign ratings
Source: Standard & Poor's Ratings Services , Author: Posted by BI-ME staff
Posted: Fri September 4, 2015 11:19 am

IRAQ. On Sept. 3, 2015, Standard & Poor's Ratings Services assigned its 'B-' long-term foreign and local currency sovereign credit ratings on the Republic of Iraq. The outlook is stable.

At the same time, we assigned our 'B' short-term foreign and local currency ratings. The transfer and convertibility(T&C) assessment is 'B-'. Iraq is the 130th sovereign rated by Standard & Poor’s.

RATIONALE

In our view, the rating on Iraq is constrained by its war with the Islamic State of Iraq and Syria (ISIS); political institutions that are in an early stage of development; and sectarian divisions between the Sunni, Shia, and Kurdish ethnic groups.

ISIS controls large areas of the north and west of the country including Iraq’s second-largest city, Mosul. Nevertheless, crucially, over 85% of Iraq’s oil fields and production are located in the south of the country close to Basra, the main port for crude exports.

These are Shia-controlled areas at some distance from the fighting. Our rating assumes that the government will remain in control of these assets. They are the key supports for the rating.

Iraq has the world’s fifth-largest proven crude oil reserves and is the second-largest oil exporter in the Organization of Petroleum Exporting Countries (OPEC). Oil dominates the Iraqi economy, contributing over 90% of government revenues and more than 95% of exports.

Iraq elected a new government, and in September 2014 Haider Al-Abadi took over as prime minister. Mr. Abadi is viewed as more inclusive and secular in his approach than his predecessor, which could help ease ethnic tensions. In addition, Mr. Abadi has planned significant reforms including cuts in the sizeof government.

After a contraction of 2.2% in 2014 and an estimated 0.3% growth in 2015, real GDP growth is expected to rise to an average of 5.7% from 2016-2018, largely as a result of the expansion of oil production.

We think that Iraq’s oil production will reach about 5 million barrels per day (b/d) by 2018 (with exports of about 4.5 million b/d), compared with around 3.1 million b/d in 2014. We expect domestic demand will remain weak for at least two years owing to the war against ISIS and general societal uncertainty.

Military and humanitarian expenditure related to the ISIS war and the decline of oil prices have hurt public finances. We project the general government fiscal deficit will reach 18% of GDP in 2015 and 12% of GDP in 2016 from a deficit of 5.5% of GDP in 2014. The widening deficit is planned to be partially financed by up to US$6 billion in external borrowing, and by domestic issuance taken up by state-owned banks.

We note that the Iraqi government has recently been able to get international financial support and access to funding from multilateral institutions. For example, the IMF recently approved a "Rapid Financing Instrument" of about US$1.24 billion.

We project that general government debt will average 65% of GDP in 2015-2018, up from about 39% of GDP in 2014. Iraq’s debt load previously benefited from an 80% haircut that the government negotiated with its Paris Club creditors in2003-2004.

Iraq’s current account has typically run a surplus owing to Iraq’s large oil exports. However, we expect the current account balance to fall into deficit in 2015 because of the sharp drop in oil prices.

We forecast Iraq’s current account deficit to average 3% of GDP in 2015-2018, compared with an average surplus of 10% of GDP in 2011-2014. We forecast narrow net external debt at about 9% of current account receipts (CARs) during 2015-2018, and we estimate average gross external financing needs as a percentage of CARs and usable reserves at about 76%.

Inflation currently remains low, with consumer price inflation in the low single digits (approximately 2.2% in 2014). We expect that the Central Bank of Iraq (CBI) will maintain the dinar’s peg to the U.S. dollar, albeit with minor fluctuations. While this has helped control inflation, the peg limits the CBI’s monetary flexibility.

OUTLOOK

The stable outlook reflects our expectation that fiscal and external deficits will not worsen beyond our forecasts and that the war with ISIS will be contained. It also incorporates our forecast of a return to strong growth from 2016 onward owing to the projected increases in oil production and oil exports. We could lower the ratings if these assumptions do not hold.

On the other hand, we could raise the ratings if Iraq’s security situation improves significantly and, with it, Iraq’s public finances.

About Standard & Poor’s Ratings Services

Standard & Poor’s Ratings Services, a part of McGraw Hill Financial (NYSE: MHFI), is the world's leading provider of independent credit risk research and benchmarks. We have approximately 1.2 million credit ratings outstanding on government, corporate, financial sector and structured finance entities and securities.

With nearly 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.

 

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