Fitch Revises Outlook on Iraq to Stable; Affirms at 'B-'

It remains uncertain what level of unidentified arrears there might be that are not yet accounted for as there are still ministries that have not been surveyed. Since June 2016 Iraq is likely to have built up arrears at a much slower rate, given the higher oil price. In 2H16 the Iraqi oil price averaged USD41/b compared with USD25/b in 1Q16

Government debt/GDP projections have improved because of smaller fiscal deficits, higher oil prices and the statistical office's upward revisions to nominal GDP (by 2.8% in 2014 and 13.6% in 2015) which have been broadly accepted by the IMF. We estimate the government debt/GDP ratio rose to 62.7% in 2016, compared with a 'B' peer median of 54.9%, and forecast it to average 61% in 2017-18. We previously expected government debt/GDP at 75% in 2018. This incorporates identified arrears. The potential for more arrears coming to light presents the risk of higher debt numbers.

Iraq's total debt stock includes an estimated USD41bn (21% of forecast 2017 nominal GDP) of debt lent to Iraq by GCC countries during the 1980-1988 Iran-Iraq war, which the authorities do not face pressure to repay or service. If this debt were restructured on the same terms as Paris Club debt was restructured, government debt/GDP would be 43% in 2016, lower than the 'B' peer median. The vast majority of remaining external debt is owed to the Paris Club and multilateral and bilateral institutions.

Iraq's 'B-' IDR also reflects the following key rating drivers:

Political risk and insecurity in Iraq are among the highest faced by any sovereign rated by Fitch. Substantial progress has been made in pushing back the Islamic State (IS), but the military campaign brings in its wake major reconstruction and humanitarian challenges. Sectarian and ethnic tensions continue to undermine political stability, relations with the Kurdish Regional Government are volatile and Iraq scores the worst of all Fitch-rated sovereigns on the composite World Bank governance indicator. This reflects not only insecurity and political instability but also corruption, government ineffectiveness and weak institutions.

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