AJ
Iraq's key points from the S&P Global Ratings report on Iraq. We affirmed our 'B-/B' ratings on Iraq. The outlook is stable.
Budget Expansion: Iraq passed a three-year expansionary budget in 2023, expected to increase general government debt.
Spending Challenges: Despite the budget, historical under-spending and regional tensions, especially with upcoming parliamentary elections in 2025, could strain fiscal finances.
Oil Dependency: Despite OPEC+ production cuts, Iraq's significant oil export volumes are expected to maintain external surpluses and foreign exchange reserves above $100 billion through 2025-2028.
Credit Ratings: S&P Global Ratings affirmed Iraq's 'B-/B' ratings with a stable outlook on February 7, 2025, due to strong FX reserves offsetting political and institutional weaknesses.
Rating Action:
Affirmation: The long-term and short-term foreign and local currency sovereign credit ratings remain at 'B-' and 'B', respectively, with a stable outlook.
Transfer and Convertibility: The assessment remains at 'B-'.
Outlook:
Stable: Iraq's FX reserves are expected to exceed debt-servicing needs, balancing against significant political and institutional risks.
Scenarios:
-Downside: Possible downgrade if institutional weaknesses or sharp declines in oil prices or production impact fiscal or external positions.
-Upside: An upgrade might occur with sustained economic growth, institutional reforms, or improved security conditions enhancing debt-servicing capacity.
-We expect only partial implementation of the 2023-2025 multiyear expansionary budget due to capacity constraints tied to scaling-up non-oil capital expenditure.
Rationale:
-Fiscal Expansion: The budget deficit is projected to widen due to increased spending on public salaries and social welfare ahead of elections.
-External Strength: Despite internal and regional issues, Iraq's external position remains strong due to oil revenues.
-Political and Security Risks: Heightened by regional conflicts and domestic political dynamics, especially around the 2025 elections.
Economic and Institutional Profile:
Oil Production: Limited by OPEC+ quotas and pipeline issues but expected to recover.
Flexibility and Performance:
-Fiscal Deficits: Likely due to high public spending and oil price sensitivity.
-Monetary Policy: Iraq's central bank has limited tools, with monetary financing playing a role in deficit management.
-We expect the exchange rate will remain fixed at Iraqi dinar (IQD) 1,300 per U.S. dollar over the forecast period through 2027.
Key Statistics:
-Economic Indicators: Show growth volatility linked to oil but with forecasts for slight improvements over the next few years.
-Fiscal Indicators: Reflect increasing debt levels and deficits. As FX reserves build and the government continues paying down foreign debt.
-we forecast the economy's liquid external assets will exceed external debt by about 80% of current account payments over 2025-2028.
-Monetary Indicators: Inflation is managed due to the dinar's peg to the USD, but banking sector stability is uncertain.
-The CBI's implementation of various de-dollarization policies, including limiting all internal commercial and trade transactions to dinars as well as settling some trade in foreign currencies other than the dollar (such as the euro, UAE dirham, and Chinese renminbi).
Iraq has the world's fourth-largest proven crude oil reserves and is the third-largest oil exporter in OPEC+ after Saudi Arabia and Russia. Oil contributes more than 40% of GDP, 90% of government revenue, and 95% of goods export receipts.
The Iraq-Turkiye crude pipeline has yet to resume full operations. Sales volumes to about 22,000 bpd from about 450,000 bpd pre-dispute (about 10% of Iraq's production).
Despite its large hydrocarbon endowment and population, Iraq has relatively low GDP per capita, at an estimated $5,600 per citizen in 2025. Unemployment rate 14%
Iraq continues to depend heavily on Iran for its electricity and gas needs.
Nevertheless, a gradual ramp-up in oil production and stronger non-oil activity will support economic growth, which we forecast at 2.2% over 2025-2028.
The financial stability of domestic banks is uncertain, and we view financial sector risk as a moderate contingent liability for the government. A restructuring of the banking sector to improve the stability and functioning of the financial system will require recapitalization, which, in our view, could entail significant costs for the government. Financial accounts audited to international standards are not available for many banks in Iraq, including state-owned Rasheed Bank and Rafidain Bank, the two largest banks (holding around 75% of financial system assets). These banks remain severely undercapitalized, according to the IMF. Private sector credit represents only about 10% of GDP. This, combined with its weak institutional framework, increases the risks to which the banking sector is exposed. Notwithstanding their financial underperformance, we expect these two banks will continue to be the main conduit for the government to fund itself via the CBI.
Sources: Central Statistical Organization Iraq, World Bank and Central Bank of Iraq (economic indicators), IMF and Central Bank of Iraq (monetary indicators), IMF and Ministry of Finance (fiscal indicators), IMF and Bank for International Settlements (external indicators).
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