The banking sector is under-developed and fundamentally weak. Private sector credit to GDP is one of the lowest of any Fitch-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 no progress in restructuring these banks, although the government has appointed auditors as required by the IMF. Fitch assumes that restructuring will require recapitalisation by the government.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Iraq a score equivalent to a rating of 'B-' on the Long-Term IDR scale.
In accordance with its rating criteria, Fitch's sovereign rating committee decided not to adopt the score indicated by the SRM as the starting point for its analysis because the SRM output has migrated from 'B' to 'B-', but in our view this is potentially a temporary deterioration.
Assuming an SRM output of 'B', Fitch's sovereign rating committee adjusted the output to arrive at the final Long-Term IDR by applying its QO, relative to rated peers, as follows:
- Structural features: -2 notches, to reflect political and security risks which are not sufficiently captured by the governance indicators in the SRM and because of the exceptionally weak banking sector.
- External finances: +1 notch, to reflect the benefits of the IMF programme, which is boosting Iraq's financing options, and to adjust for the legacy debt to GCC countries which the authorities do not face any pressure to repay or service.
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