Fitch revises Iraq’s Outlook to Negative

Fitch Ratings has revised its outlook on Iraq’s Long-term foreign currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at ‘B-‘.

The Country Ceiling has been affirmed at ‘B-‘ and the Short-Term foreign currency IDR at ‘B’.

KEY RATING DRIVERS

The revision of the Outlook reflects the following key rating drivers:

Lower oil prices are driving a significant deterioration of Iraq’s financial position. Commodity dependence is among the highest of all rated sovereigns. Oil accounts for more than 50% of GDP and over 90% of fiscal and current external receipts.

The budget deficit widened in 2015 to an estimated 8.2% of GDP, due to sharply lower oil prices. The 2016 budget envisages a larger deficit, but its assumptions of an average oil price of USD45/b and 3.6m b/d of crude exports still look optimistic. Fitch forecasts that Brent crude will average USD35/b in 2016, suggesting an Iraqi price of USD32/b (based on the average discount in 2013-15). Assuming crude exports remain at current levels of around 3.3m b/d and the government enacts modest spending cuts, we project the budget deficit to widen to 15% of GDP in 2016. Fitch expects this to moderate to 7.6% of GDP in 2017 as oil prices rise.

In 2015 the government received USD1.2bn each from the IMF and World Bank and further foreign concessional loans are likely. Iraq and the IMF agreed on a Staff Monitored Program (SMP) in November with the aim of moving to a stand-by arrangement (SBA). Iraq is hoping to revive plans to issue Eurobonds of up to USD2bn this year. Fitch believes this is contingent on securing a SBA with the IMF. Meanwhile, domestic issuance of T-bills has ramped up, with indirect monetary financing by the central bank playing a substantial role. Despite some modest initiatives to introduce new excise and consumption taxes, there is little prospect of substantial revenue diversification in the medium term.

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