Moody's Rates Iraqi Govt Bonds

Moderate fiscal strength

Iraq's fiscal metrics have strengthened since 2003. The fiscal balance has recorded an average surplus of 0.3% of GDP between 2005 and 2014. Following external debt reduction in 2005, total government debt declined from around 344% of GDP in 2004 to 32% in 2013, according to data from the IMF.

The decline in oil prices since mid-2014 has hit government revenues as oil accounts for around 90% of total revenues. Moody's projects an average Brent oil price of $55 per barrel in 2015 and $57 per barrel in 2016. Government revenues have been declining since 2013, and Moody's expects them to drop by 35% in 2015 compared to 2014. While the rating agency also expects some expenditure reduction, the resulting deficit will be very large, amounting to 18% of GDP. Although oil exports will likely grow in 2016, the fiscal deficit will stay wide at around 15% of GDP.

Financing these deficits will increase the government debt ratio to around 79% of GDP by the end of 2016. But Moody's expects the debt ratio to decline subsequently, to slightly less than 70% of GDP in 2019, as oil prices recover and oil production rises. However, government revenues will remain vulnerable to oil price swings.

The insurgency by ISIL is pressuring government finances, via increased spending on security and social spending for internally displaced persons, as well as on reconstruction of affected areas. The other channel is via decreased revenues from ISIL controlled areas, where the federal government has continued spending on public services without receiving any revenues.