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Iraq Country Risk Report Q1 2016

Iraq Country Risk Report Q1 2016

Core Views

Islamic State (IS) will remain well entrenched over the coming year, and Iraqi security forces and their allies will focus on re-conquering the Anbar province. Iraq will maintain formal unity within a fragile federalised state over the coming decade, with the Kurdish region retaining significant autonomy but not outright independence.

The growth of the Iraqi economy in 2016 will result from a moderate increase in oil exports. Conversely, domestic expansion will be sluggish and uneven; consumer spending and capital formation will be hit hard by political instability, and declining oil prices will hinder the government's ability to prop up spending.

Major Forecast Changes

We believe that the Iraqi central bank will devalue the Iraqi dinar by 10% in H216, as pressures on the country's foreign exchange reserves and on the government's budget become too high, amid low global oil prices. As a result, we forecast the Iraqi dinar to trade at IQD1,304/USD by the end of 2016 compared to our previous forecast of IQD1,267/USD.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Tide Turning In The Fight Against IS
Iraq will recapture Ramadi and Baiji over the coming months, with the help of Russian and Iranian intelligence, and further US support.
This will provide momentum for further Iraqi advances against Islamic State, but it will not enable Iraqi forces to take back Mosul in a
swift military campaign.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Risks Of State Collapse - Scenarios Assessed
Iraq will maintain formal unity within a more fragile federalised state over the coming decade, but risks that the country will return to fullblown
sectarian civil war are high. We believe Islamic State (IS) will be defeated by Iraqi forces with support from the US and Iran, but
this will take more than 12 months given that IS is still well entrenched in the west and north of Iraq, and still controls Mosul, the country's
second largest city.
TABLE: LONG-TERM SCENARIOS
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Slow Recovery Masking Economy In Pieces
Iraq's economic growth will remain sluggish over the next two years at least, with the war against Islamic State and low global oil prices
providing major headwinds to economic activity.
GDP By Expenditure Outlook
TABLE: PRIVATE CONSUMPTION
TABLE: GOVERNMENT CONSUMPTION
Fiscal Policy And Public Debt Outlook
Deficit Paving Way For IQD Depreciation
Iraq will continue to run large public deficits in 2016, on the back of low oil prices and a limited ability to curb government spending,
reinforcing our view that the central bank will depreciate the Iraqi dinar next year.
TABLE: FIXED INVESTMENT
TABLE: NET EXPORTS
TABLE: FISCAL POLICY
Currency Forecast
10% Devaluation On The Cards
The Iraqi dinar will be devalued by 10% in 2016, as the central bank is unable to protect the peg amid low oil prices. As a result of
the devaluation, the current account and fiscal deficits will narrow faster, but the move will also push up inflation, affecting private
consumption and broader economic activity.
Monetary Policy
Hiking In 2016
After six years of monetary stability, the Central Bank of Iraq will raise its policy rate over 2016 to partially counter double-digit inflation
induced by currency depreciation. We expect the Iraqi benchmark rate to reach 7.00% by the end of 2016, compared to 6.00% between
2010 and 2015. 19
TABLE: MONETARY POLICY
Investment Climate
FDI Outlook To Remain Grim
The expected adoption of a new investment law in Iraq will not result in a surge of foreign investment, given the desperate security situation which impacts upon all facets of doing business in the country. In addition, weak oil prices and debts owed to energy companies will deter investment in the main sector of the economy.
Chapter 3: 10-Year Forecast
The Iraqi Economy To 2024
Success Story In Jeopardy
Iraq's potential as a regional economic outperformer has faded as a result of elevated political instability, and we project real GDP expanding by a yearly average of 4.0 % over the 2015-2024 period. The oil and gas sector will be the lifeblood of the economy over this time frame despite declining oil prices.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Education
TABLE: MIDDLE EAST AND NORTH AFRICA - EDUCATION RISK
TABLE: GRADUATES OF TERTIARY EDUCATION, 2010-2012 ('000)
Government Intervention
TABLE: MIDDLE EAST AND NORTH AFRICA - GOVERNMENT INTERVENTION RISK
Chapter 5:BMI Global Macro Outlook
Global Outlook
Exit The Dragon
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %

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