Fitch Affirms Iraq at ‘B-‘; Outlook Negative

Fitch Ratings has affirmed Iraq’s Long-Term Issuer Default Rating (IDR) at ‘B-‘ with a Negative Outlook. The Country Ceiling is affirmed at ‘B-‘ and the Short-Term IDR at ‘B’.

KEY RATING DRIVERS

Political risk and insecurity in Iraq are among the highest faced by any sovereign rated by Fitch. Progress has been made in pushing back the Islamic State (IS), but the military campaign brings in its wake major reconstruction and humanitarian challenges.

Sectarian and ethnic tensions continue to undermine political stability, relations with the Kurdish Regional Government are volatile and Iraq scores the worst of all Fitch-rated sovereigns on the composite World Bank governance indicator. This reflects not only insecurity and political instability but also corruption, government ineffectiveness and weak institutions.

The bulk of oil production facilities and export infrastructure are located away from areas of insecurity. After expanding strongly in 2015, oil output in the south has stabilised so far in 2016 at 3.5m b/d on average, given lower budgeted government payments to international oil companies, which has constrained investment. Including output from the north, which incorporates Kurdish fields, total oil production totalled 4.6m b/d in July, according to the Ministry of Oil. Given low oil prices we expect the government to budget a similar amount for oil investment in 2017 and we forecast oil production and exports (at 3.3m b/d) to plateau.

Lower oil prices are driving significant deterioration in Iraq’s financial position. Commodity dependence is among the highest of all Fitch-rated sovereigns. Oil accounts for more than 50% of GDP and over 90% of fiscal and current external receipts. The budget deficit in 2015 ballooned to IQD26.4trn (USD22.3bn) or 13.9% of GDP. This was financed by a mixture of T-bill issuance to banks refinanced to a large degree by the CBI (indirect monetary financing), accumulation of domestic and external arrears and multilateral financing.

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