Fitch revises Iraq's Outlook to Negative

The bulk of oil production facilities and infrastructure are away from areas of insecurity. Oil output expanded strongly to 3.5m b/d on average in 2015, from 3.1m b/d in 2014, reaching a high of 3.7m b/d in November-December. Including estimated output from Kurdish fields, end-2015 production was about 4.3m b/d. However, investment is likely to slow in 2016 in the face of lower oil prices with the government budgeting smaller payments to international oil companies.

The banking sector is under-developed and fundamentally weak. Private sector credit to GDP is one of the lowest of any rated sovereign. The two large state-owned banks Al-Rafidain and Al-Rasheed, which have high non-performing loans and exceptionally low capital adequacy, dominate the sector. There has been little progress in restructuring these banks; an exercise that Fitch assumes will require recapitalisation by the government.

RATING SENSITIVITIES

• The main factors that could, individually or collectively, lead to a downgrade are:
  Evidence of stress in financing fiscal shortfalls.
  Further deterioration in the country's security, particularly if insecurity spreads to new geographical areas or hinders oil production or exports.

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

• A sustained period of oil prices in excess of our current forecasts, particularly if combined with higher oil production and exports 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

KEY ASSUMPTIONS

Fitch forecasts Brent crude to average USD35/b in 2016 and USD45/b in 2017. Fitch conservatively forecasts Iraqi oil exports (excluding exports from the Kurdish region) to average 3.3m b/d in 2016-17.

Given a patchy track record in 2014-15, Fitch does not incorporate an oil-sharing agreement between the central government and the Kurdish Regional Government.

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

(Source: Fitch)

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