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Iraq Country Risk Report Q2 2015

Iraq Country Risk Report Q2 2015

Core Views

Risks of a return to full-blown civil war are elevated following thetakeover of jihadist group Islamic state (IS) of the country's northand west.

RobusTheadline growth of the Iraqi economy in 2015 will result fromaccelerating oil exports. Conversely, domestic expansion will besluggish and uneven; consumer spending and capital formation willbe hit hard by political instability, and declining oil prices will hinderthe government's ability to prop up spending.

Major Forecast Changes

Iraq's current account surplus will narrow significantly in 2015 asdeclining oil prices will hit the value of hydrocarbons exports. Weforecast Iraq's current account to come in a deficit of 6.8% of GDPin 2015, from our previous forecast of a surplus of 4.5% of GDP andcompared to surplus of 9.8% of GDP in 2014.


Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Islamic State At Territorial Limits, But Defeat A Way Off
IS has reached its territorial zenith in Iraq. However, the group will remain resilient in the area s it currently controls for at least the next
two years. Its ability to govern remain s relatively strong, even with the decline in oil prices reducing revenues from captured oil fields.
Ultimately, the group will only be defeated with a political solution which address es Sunni grievances with the Baghdad government.
TABLE: Political Overview
Long-Term Political Outlook
Rising Risk 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 full
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Middle East over the coming years.
TABLE: Long-Term Scenarios
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
2015 Growth Rate Masks Structural Weakness
Growth in the Iraqi economy will accelerate in 2015 due to increasing oil exports, but the domestic economy will remain in a crisis due
to elevated security risks and low oil prices. We project real GDP expansion of 7.1% in 2015 and 2.0% in 2016; growth will average only
3.5% over the next five years, with minimal productivity gains.
TABLE: Economic Activity
Fiscal Policy
Limited Ability To Prevent Significant Fiscal Deficit
Iraq will fall into a sustained fiscal deficit as weaker oil prices have a drastic impact on the government's revenues. Spending will remain
elevated, with the state possessing limited ability to reduce spending plans beyond cutting back on capital expenditure. The delay of the
final reparations payment to Kuwait till 2016 will temporarily cushion the impact of lower oil prices. We forecast the budget deficit coming
in at -7.8% of GDP in 2015 from an estimated 2.6% of GDP surplus in 2014.
TABLE: Fiscal Policy
Monetary Policy
Prices To Rise Dramatically In IS-Controlled Areas
Inflation will accelerate in Iraq in 2015, a result of political instability and difficulties in maintaining the food and fuel subsidy system.
Prices will rise gradually in areas under central government control, and spike dramatically in regions under the rule of jihadist group
Islamic State. We project CPI inflation in areas governed by Baghdad to average 3.5% in 2015 and 4.5% in 2016, from 2.4% in 2014.
Balance Of Payments
Weaker External Position Hitting Creditworthiness
Iraq's current account will come in deficit of 6.8% and 5.4% in 2015 and 2016, respectively, from a surplus of 9.8% of GDP in 2014,
largely due to lower oil prices. The Iraqi government will run its foreign exchange reserves and resort to increased borrowing to avoid an
external payments crisis; the country's creditworthiness has irremediably worsened, and yields on Iraq's 2028 bond will remain high over
the coming years.
TABLE: Current Account
Iraq Q2 2015
Islamic Finance
UAE To Cement Position As Regional Hub
The UAE's Islamic banking sector will continue recording substantial growth as new government regulation increases its attractiveness
to domestic and regional companies. Whilst Malaysia will remain the global leader for several years, we expect the UAE to record higher
growth rates. Beyond these two hubs, we see increasing potential for Islamic banking in Nigeria and Thailand.
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 4.3% over the 2014-2023 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: Operatio nal Risk
Availability Of Labour
TABLE: Middle East and North Africa - Availabilit y of Labour Risk
TABLE: Top 10 Source Cou ntries For Migra nt Workers
Crime Risk
TABLE: MENA - Crime Risks
Chapter 5: BMI Global Assumptions
Global Outlook
Weaker EMs To Weigh On Growth
Table: Global Assumptions
Table: Developed States, Real GDP GrowtH, %
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
Table : Emergi ng Markets , Real GDP Growth , %

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