Moody’s Investors Service affirmed the Caa1 long-term non-investment grade rating of Iraq and maintained its stable outlook.
“The rating affirmation reflects credit challenges posed by Iraq's exceptionally high economic and fiscal reliance on oil, and very weak institutions and governance that … will continue to limit policy effectiveness, constrain the government's capacity to respond to external and domestic shocks and weigh on the already low competitiveness of Iraq's economy,” Moody’s said.
Iraq, Opec’s second-largest producer, depends heavily on oil to meet 90 per cent of its spending.
As oil prices declined 35 per cent last year during the pandemic, the country's economy was on the brink of collapse, with the public sector burning through $5 billion a month on salaries for government servants. The country's economy is estimated to have contracted nearly 16 per cent last year according to Moody's estimates, above the International Monetary Fund's 10.9 per cent forecast.
Oil prices have rebounded this year, gaining about 50 per cent, but Iraq is plagued by fiscal mismanagement and political divisions that have hindered economic progress and the implementation of needed reforms. The country's oil output has been reduced by about 13 per cent, as a result of production cuts agreed by the Opec+ alliance.
Moody's expects a sharp “upward reversal in fiscal and external sector metrics in 2021” as oil prices trade higher but “progress on economic diversification remains slow and hampered by Iraq's weak business environment and investment climate”.
The ratings agency maintained its stable outlook on the country as the government continues discussions with the IMF for financial support.
“While ongoing discussions with the IMF indicate a possibility of a supported adjustment programme that would serve as a policy anchor and provide a financial backstop, the country's poor track record on its previous commitments to the IMF limits potential credit upside,” it said.
The government's plans to nearly double oil production capacity in the medium term “would support economic growth and strengthen Iraq's fiscal and external position”.
However, Iraq’s plans could be constrained by the uncertain outlook for global oil demand and Iraq's persistent governance and political stability challenges that discourage investment in the oil and gas sector.
Iraq plans to increase oil production capacity to 8 million barrels per day by 2029 from less than 5 million bpd currently.
Moody’s also said Iraq's deeply fragmented political landscape and elevated political stability risks will continue to thwart progress on institutional and economic reforms.
In addition to this, higher oil prices and significantly reduced government funding needs since the end of 2020 have reduced the impetus to advance reforms, the ratings agency said.
“Policy implementation will also be constrained by the upcoming early elections set for October 10 and based on the aftermath of the 2018 elections, a likely protracted period of political negotiations and policy paralysis before the next government is formed and approved by parliament.”