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.
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.
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