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Iraq Country Risk Report Q2 2016

Iraq Country Risk Report Q2 2016

Core Views

Islamic State (IS) will remain well entrenched over the coming year,and Iraqi security forces (ISF) and its allies will focus on re-conqueringthe Anbar province. Iraq will maintain formal unity within a fragilefederalised state over the coming decade, with the Kurdish regionretaining significant autonomy but not outright independence.

Stronger headline growth of the Iraqi economy in 2015 will resultfrom accelerating oil exports. Conversely, domestic expansion willbe sluggish and uneven; consumer spending and capital formationwill be hit hard by political instability, and declining oil prices willhinder the government's ability to prop up spending.

Major Forecast Changes

The Iraqi Central Bank will devalue the Iraqi dinar by 7% in H216,as pressures on the country's foreign exchange reserves and on thegovernment's budget become too high, amid low global oil prices.

As a result, we forecast the Iraqi dinar to trade at IQD1,265/USDcompared to our previous forecast of IQD1,182/USD.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Oil Price Slump, Violence, To Stifle Growth
The Iraqi economy will grow by a small 0.3% in real terms over 2016, as oil production plateaus and as low global oil prices limit
government spending and slash capital expenditure. Non-oil economic activity will remain flat, as the conflict between Baghdad and
Islamic State prevents manufacturing and agricultural production to recover.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal Policy And Public Debt Outlook
Dire Times To Continue In 2016
Iraq's fiscal deficit will remain large in 2016, with the government unable to increase revenues amid low oil prices and struggling
to cut current expenditure while fighting Islamic State. As a result, public investment will continue falling and public borrowing from
the domestic banking sector will further crowd out private investors, impacting the country's reconstruction and long-term growth
prospects.
Structural Fiscal Position
TABLE: BREAKDOWN OF REVENUES AND EXPENDITURE
External Trade And Investment Outlook
Further Pain Ahead Amid Low Oil Prices
Severely impacted by low global oil prices and regional insecurity, Iraq's current account will continue to post large deficits over the
coming years. Given the absence of positive prospects for FDI amid a dire operating environment, Baghdad will carry much of the
burden in terms of financing the deficit, resulting in a steady decline in the country's stock of foreign reserves.
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: BREAKDOWN OF IMPORTS IN 2014
Monetary Policy
Further Devaluation Ahead
The 1.37% devaluation of the Iraqi dinar by the CBI on December 21 will not sufficiently increase the Iraqi government's revenues to
cover the IQD28trn deficit planned for FY2016. As a result, the CBI will engage in further devaluation over 2016, leading to the currency
depreciating by 10% against the US dollar over the next twelve months.
TABLE: BREAKDOWN OF EXPORTS IN 2014
Monetary Policy Framework
Chapter 2: 10-Year Forecast
The Iraqi Economy To 2025
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 3.6% over the 2016-2025 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 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Sectarian Tensions To Continue, Even Without IS
The hypothetical removal of IS from Iraq would not lead to sectarian and ethnic tensions suddenly disappearing. Rather, confrontation
is likely to increase between Kurdish forces and Baghdad and Shi'a militias once the main security threat is removed. In addition, the
Sunni-Shi'a divide will remain high as long as the Sunni minority remains on the side line of federal politics.
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
full – blown sectarian civil war are high. We believe the IS will be defeated by Iraqi forces with support from the United States and Iran,
but this will take more than twelve 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 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: MIDDLE EAST AND NORTH AFRICA – TRADE PROCEDURES AND GOVERNANCE RISK
TABLE: IMPORT AND EXPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Downside Risks Gather Momentum
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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