Fitch Rates Iraqi Debt as 'Junk'

Iraq scores the worst of all Fitch-rated sovereigns on the composite World Bank governance indicator, reflecting not only insecurity and political instability but also corruption, government ineffectiveness and weak institutions. Doing Business indicators are below the peer median, although there is outperformance in some areas. GDP per capita, at USD5,300, is almost 50% greater than the peer median, but the Human Development Index is in line.

RATING SENSITIVITIES

The main factors that could, individually or collectively, lead to a positive rating action are:

• A sustained period of oil prices in excess of our current forecasts, particularly if combined with higher oil production and leading to an improvement in Iraq's public and external finances.
• A fundamental improvement in the country's security that allows for stronger non-oil economic development.

The main factors that could, individually or collectively, lead to a negative rating action are:

• Further deterioration in the country's security, particularly if insecurity spreads to new geographical areas or hinders oil production or exports.
• A failure to narrow the budget deficit and a rapid build-up of government debt, or a failure to secure adequate financing for the budget deficit.

KEY ASSUMPTIONS

Fitch forecasts Brent crude to average USD65/b in 2015, USD75/b in 2016 and USD80/b in 2017. Iraqi oil production is conservatively forecast to increase to an average of 4.2m b/d in 2017.

Fitch assumes that the Kurdish region will not try to break away over the forecast period and that periodic tensions will not descend into serious military confrontation with the federal government or result in serious damage to oil export infrastructure.

Fitch assumes ongoing serious security threats, with large parts of the north east outside of the government's control.

(Source: Fitch, Financial Times, The Guardian)

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