Iraq Country Risk Report Q1 2020

Iraq Country Risk Report Q1 2020

While the conclusion of military conflict has led to a brighter outlook for Iraq's economy, the country still suffers from high levels of operational risk, regional tensions (US-Iran tensions in particular) and more sluggish oil prices than in 2018.

We expect Iraqi real GDP growth to be relatively robust in 2019 on the back of expansionary fiscal policy. Headline growth will lose steam in 2020 as lower oil prices force the authorities to rein in spending, with knock-on effects on broader domestic demand. Although we do not expect Iraq to adhere completely to OPEC+ production quotas, even partial compliance will continue to keep a cap on oil production growth in both 2019 and 2020..

We expect Iraq's fiscal balance to move deeply into deficit over the coming years. Revenue will be negatively affected by lower oil prices, and spending pressures will remain acute amid political volatility. However, these deficits will remain sustainable given the country's relatively low debt load and ongoing support from concessional lenders and bilateral partners.

We forecast Iraq's current account surplus to narrow from 16.7% of GDP in 2018 to 9.8% in 2019 and 5.7% in 2020. The narrowing of the surplus will be primarily driven by a combination of low oil prices and strong demand for capital imports.

An attack on an Iran-backed militia in late August raise the prospect of instability in Iraq. Given that US-Iran tensions look set to remain elevated in the coming months, we view it as likely that Iran will continue efforts to its proxies' military capabilities, leaving Iraq exposed to further attacks of the same nature. Overall, we believe this will pose additional challenges to Iraq's domestic stability and cohesion, weighing on policymaking processes and hampering the integration of the Popular Mobilization Forces into Iraq's broader military apparatus.

Key Risks

Sectarian tensions will remain elevated, even with the defeat of Islamic State. Sunni grievances could turn violent again if Baghdad fails to reconstruct the Sunni territory it re-conquered from IS.

Furthermore, the spillover of US-Iran tensions will pose threats to the country's business environment, deterring much needed investment into the country.

A renewed drop in oil prices remains a long-standing risk to the country's external and fiscal account dynamics.


Executive Summary
Core Views
Key Risks
Country Risk Summary
Economic Risk Index
Political Risk Index
SWOT
Economic – SWOT Analysis
Political – SWOT Analysis
Economic Outlook
Economic Growth Outlook
Iraqi Economy Buoyed By Fiscal Spending In 2019 Before Losing Steam In 2020
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
External Trade And Investment Outlook
Iraq Current Account Surplus To Decline On Lower Energy Prices
Outlook On External Position
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
TABLE: BREAKDOWN OF IMPORTS IN 2018
TABLE: BREAKDOWN OF EXPORTS IN 2018
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Fiscal Policy And Public Debt Outlook
Surging Iraqi Budget Shortfall To Be Covered By Debt And Bilateral Support
Structural Fiscal Position
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS MACRO RESEARCH and is NOT a comment on Fitch Ratings’ Credit Rating. Any comments or data included in the report are solely derived from Fitch Solutions Macro Research and independent sources. Fitch Ratings’ analysts do not share data or information with Fitch Solutions Macro Research.Iraq Country Risk Q1 2020Contents10-Year Forecast
The Iraqi Economy To 2028
Reconstruction And Oil Set To Be The Lifeblood Of The Economy
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Political Outlook
Domestic Politics
Alleged Israeli Strikes On PMF Likely To Exacerbate Iraq's Domestic Tensions
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Sectarian Tensions To Remain The Key Risk
Operational Risk
TABLE: OPERATIONAL RISK
Economic Openness
TABLE: TOP FIVE EXPORT PARTNERS AND PRODUCT EXPORTS, 2014
TABLE: FREE TRADE AGREEMENTS
TABLE: TARIFF AND NON-TARIFF TRADE BARRIERS
TABLE: FREE TRADE ZONES AND INVESTMENT INCENTIVES
TABLE: BARRIERS TO FDI
Utilities Network
TABLE: ELECTRICITY RISKS
TABLE: FUEL RISKS
TABLE: TELECOMMUNICATIONS RISKS
TABLE: WATER RISKS
Global Macro Outlook
Downside Revisions To Stabilise Somewhat, But Policy Risks Remain
TABLE: GLOBAL MACROECONOMIC FORECASTS (2018-2023)
TABLE: DEVELOPED MARKETS – REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS – REAL GDP GROWTH, % y-o-y
Index Tables
TABLE: IRAQ – MACROECONOMIC DATA AND FORECASTS

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