Moody's Rates Iraqi Govt Bonds

Looking forward, Moody's expects oil production to continue to increase by an average of 10% per year, reaching around 5 million barrels per day (mbpd) by 2019. Together with a recovery in non-oil growth from 2016 onwards, this will help lift real GDP growth to an average 8% per year between 2016 and 2019.

Iraq's robust growth outlook is counterbalanced by the lack of economic diversification, with oil accounting for 50% of nominal GDP and close to 100% of exports, and the non-oil sector dominated by the public sector. Manufacturing and construction together account for only 10% of GDP in 2014, and while services have a share of 37%, more than one third of this comes from general government services.

Very low institutional strength

Iraq ranks at the very low end when compared across all Moody's-rated sovereigns for the World Bank's Worldwide Governance Indicators -- particularly Government Effectiveness, Rule of Law, and Control of Corruption. In Moody's view, the lack of a budget law for 2014 and low budget execution rates illustrate shortcomings with regard to government effectiveness.

According to the 2004 Central Bank of Iraq (CBI) Law, the central bank is independent from the government. The CBI's primary objectives are domestic price stability and a stable and competitive market-based financial system. The central bank has successfully reduced inflation rates and consumer price inflation averaged 2.7% between 2008 and 2014.

While detailed and monthly oil sector data are available, the analysis of the non-oil sector is hampered by the lack of high-frequency activity indicators and quarterly expenditure side national accounts data. Quarterly balance of payments data are only available with a lag of three quarters.