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Iraq’s credit profile constrained by poor governance, Moody’s says

Country is facing political risk and its attempts to diversify economy are not enough, says report

Iraq’s nominal GDP was almost $226 billion in 2018, making it one of the largest economies in MENA region. AP
Iraq’s nominal GDP was almost $226 billion in 2018, making it one of the largest economies in MENA region. AP

The Iraq government’s ability to repay debts is constrained by a number of challenges, such as weak institutions and poor governance, according to a new report by Moody's Investors Service.

These challenges affect the government’s abilities “to respond to external and domestic shocks” and also “weigh on the competitiveness of the economy”, it added in a report issued on Thursday.

“Iraq has made slow progress on its structural reform agenda, which includes enacting laws and developing institutions to support public financial management,” said Alexander Perjessy, Moody’s vice president and senior analyst.

Moody’s has a credit rating of Caa1 on Iraq’s sovereign debt, and a stable outlook. Typically, a rating below Baa3 is considered to be sub-investment grade, or junk. A Caa rating means debt obligations “are judged to be of poor standing and are subject to very high credit risk”, according to the New York-based agency’s definition.

The agency said Iraq witnessed an improvement in its fiscal health last year but that was “almost entirely due to higher oil prices”.

However, Iraq is currently facing very high levels of political risk and its attempts to diversify the economy have not been bold enough.

“Obstacles to the growth of private non-oil industries include poor infrastructure, an inefficient banking system, an unstable electricity supply, skilled labour shortages and weak control on corruption,” said Mr Perjessy.

Iraq’s nominal gross domestic product was almost $226 billion in 2018, making it one of the largest economies in the Middle East and North Africa. This jump was mainly driven by income derived from Iraq's oil industry, which accounts for about 45 per cent of nominal GDP and almost all of the country’s exports.

Despite a relatively large economy, substantial natural resources and high growth potential, things are moving slowly in Iraq, said Moody’s.

“Potential is limited by the slow pace of rebuilding infrastructure and productive capacity following years of conflict,” it added.

Iraq possesses extensive oil reserves, accounting for around 12 per cent of Opec's proved oil reserves and more than 8 per cent of global proved reserves, which at current levels of production would last approximately 87 years.

It’s proved oil reserves are the fifth-largest in the world behind Venezuela, Saudi Arabia, Canada and Iran. But the country's hydrocarbon wealth remains under-exploited in view of the many years of armed conflicts and international sanctions, said Moody’s.

Geopolitical tensions in the Middle East, which have concerned the transit of oil along heavily congested pathways such as the Strait of Hormuz, also pose "a significant risk to Iraq's credit profile," said Moody's.

In the past few weeks, the country has also been rocked by protests over widespread unemployment, failing public services and state corruption, leading to the deaths of dozens of people.

Despite this, the agency said that a much-needed rebuilding of its infrastructure should lead to stronger growth in Iraq’s non-oil growth.

“As more reconstruction projects get underway in 2020… it will support a gradual recovery in overall real GDP growth to 2.8 per cent in 2019 and 4.6 per cent in 2020 from an estimated contraction of 0.6 per cent in 2018 and 2.5 per cent in 2017.”

Updated: October 20, 2019 08:06 AM

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