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S&P Assigns ‘B-/B’ Ratings To Republic of Iraq; Outlook Stable
September 4, 2015
By Bloomberg
Press Release: S&P Assigns ‘B-/B’ Ratings To Republic of Iraq; Outlook Stable
The following is a press release from Standard & Poor's:
OVERVIEW
-- In our view, Iraq faces security and institutional risks that are among
the highest of all rated sovereigns--stemming primarily from its war with
ISIS--as well as significant fiscal and external pressures due to the sharp
fall in oil prices in the second half of last year.
-- However, Iraq benefits from massive oil reserves and high oil exports.
Projected large increases in oil production will, in our view, support economic
growth and help alleviate fiscal and external pressures over the medium term.
-- We are assigning our 'B-/B' long- and short-term foreign and local
currency sovereign credit ratings to Iraq.
-- The stable outlook is premised on our expectation that fiscal and
external deficits will not worsen beyond our forecasts and that the war with
ISIS will be contained.
RATING ACTION
On Sept. 3, 2015, Standard & Poor's Ratings Services assigned its 'B-'
long-term foreign and local currency sovereign credit ratings on the Republic
of Iraq. The outlook is stable. At the same time, we assigned our 'B'
short-term foreign and local currency ratings. The transfer and convertibility
(T&C) assessment is 'B-'. Iraq is the 130th sovereign rated by Standard &
Poor's.
RATIONALE
In our view, the rating on Iraq is constrained by its war with the Islamic
State of Iraq and Syria (ISIS); political institutions that are in an early
stage of development; and sectarian divisions between the Sunni, Shia, and
Kurdish ethnic groups. ISIS controls large areas of the north and west of the
country including Iraq's second-largest city, Mosul. Nevertheless, crucially,
over 85% of Iraq's oil fields and production are located in the south of the
country close to Basra, the main port for crude exports. These are
Shia-controlled areas at some distance from the fighting. Our rating assumes
that the government will remain in control of these assets. They are the key
supports for the rating.
Iraq has the world's fifth-largest proven crude oil reserves and is the
second-largest oil exporter in the Organization of Petroleum Exporting
Countries (OPEC). Oil dominates the Iraqi economy, contributing over 90% of
government revenues and more than 95% of exports.
Iraq elected a new government, and in September 2014 Haider Al-Abadi took over
as prime minister. Mr. Abadi is viewed as more inclusive and secular in his
approach than his predecessor, which could help ease ethnic tensions. In
addition, Mr. Abadi has planned significant reforms including cuts in the size
of government.
After a contraction of 2.2% in 2014 and an estimated 0.3% growth in 2015, real
GDP growth is expected to rise to an average of 5.7% from 2016-2018, largely as
a result of the expansion of oil production. We think that Iraq's oil
production will reach about 5 million barrels per day (b/d) by 2018 (with
exports of about 4.5 million b/d), compared with around 3.1 million b/d in
2014. We expect domestic demand will remain weak for at least two years owing
to the war against ISIS and general societal uncertainty.
Military and humanitarian expenditure related to the ISIS war and the decline
of oil prices have hurt public finances. We project the general government
fiscal deficit will reach 18% of GDP in 2015 and 12% of GDP in 2016 from a
deficit of 5.5% of GDP in 2014. The widening deficit is planned to be partially
financed by up to US$6 billion in external borrowing, and by domestic issuance
taken up by state-owned banks. We note that the Iraqi government has recently
been able to get international financial support and access to funding from
multilateral institutions. For example, the IMF recently approved a "Rapid
Financing Instrument" of about US$1.24 billion.
We project that general government debt will average 65% of GDP in 2015-2018,
up from about 39% of GDP in 2014. Iraq's debt load previously benefited from an
80% haircut that the government negotiated with its Paris Club creditors in
2003-2004.
Iraq's current account has typically run a surplus owing to Iraq's large oil
exports. However, we expect the current account balance to fall into deficit in
2015 because of the sharp drop in oil prices. We forecast Iraq's current
account deficit to average 3% of GDP in 2015-2018, compared with an average
surplus of 10% of GDP in 2011-2014. We forecast narrow net external debt at
about 9% of current account receipts (CARs) during 2015-2018, and we estimate
average gross external financing needs as a percentage of CARs and usable
reserves at about 76%.
Inflation currently remains low, with consumer price inflation in the low
single digits (approximately 2.2% in 2014). We expect that the Central Bank of
Iraq (CBI) will maintain the dinar's peg to the U.S. dollar, albeit with minor
fluctuations. While this has helped control inflation, the peg limits the CBI's
monetary flexibility.
OUTLOOK
The stable outlook reflects our expectation that fiscal and external deficits
will not worsen beyond our forecasts and that the war with ISIS will be
contained. It also incorporates our forecast of a return to strong growth from
2016 onward owing to the projected increases in oil production and oil exports.
We could lower the ratings if these assumptions do not hold.
On the other hand, we could raise the ratings if Iraq's security situation
improves significantly and, with it, Iraq's public finances.
KEY STATISTICS
RATINGS SCORE SNAPSHOT
RELATED CRITERIA AND RESEARCH
Related Criteria
-- Criteria - Governments - Sovereigns: Sovereign Rating Methodology -
December 23, 2014
-- General Criteria: Methodology For Linking Short-Term And Long-Term
Ratings For Corporate, Insurance, And Sovereign Issuers - May 07, 2013
-- General Criteria: Methodology: Criteria For Determining Transfer And
Convertibility Assessments - May 18, 2009
Related Research
-- Default, Transition, and Recovery: 2014 Annual Sovereign Default Study
AndRating Transitions, May 18, 2015
In accordance with our relevant policies and procedures, the Rating Committee
was composed of analysts that are qualified to vote in the committee, with
sufficient experience to convey the appropriate level of knowledge and
understanding of the methodology applicable (see 'Related Criteria And
Research'). At the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary analyst had been
distributed in a timely manner and was sufficient for Committee members to make
an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk
factors were considered and discussed, looking at track-record and forecasts.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the
rating committee are summarized in the above rationale and outlook. The
weighting of all rating factors is described in the methodology used in this
rating action (see 'Related Criteria and Research').
RATINGS LIST
Republic of Iraq
Sovereign credit rating
Foreign and Local Currency B-/Stable/B
Transfer & Convertibility Assessment B-
[You must be registered and logged in to see this link.]
September 4, 2015
By Bloomberg
Press Release: S&P Assigns ‘B-/B’ Ratings To Republic of Iraq; Outlook Stable
The following is a press release from Standard & Poor's:
OVERVIEW
-- In our view, Iraq faces security and institutional risks that are among
the highest of all rated sovereigns--stemming primarily from its war with
ISIS--as well as significant fiscal and external pressures due to the sharp
fall in oil prices in the second half of last year.
-- However, Iraq benefits from massive oil reserves and high oil exports.
Projected large increases in oil production will, in our view, support economic
growth and help alleviate fiscal and external pressures over the medium term.
-- We are assigning our 'B-/B' long- and short-term foreign and local
currency sovereign credit ratings to Iraq.
-- The stable outlook is premised on our expectation that fiscal and
external deficits will not worsen beyond our forecasts and that the war with
ISIS will be contained.
RATING ACTION
On Sept. 3, 2015, Standard & Poor's Ratings Services assigned its 'B-'
long-term foreign and local currency sovereign credit ratings on the Republic
of Iraq. The outlook is stable. At the same time, we assigned our 'B'
short-term foreign and local currency ratings. The transfer and convertibility
(T&C) assessment is 'B-'. Iraq is the 130th sovereign rated by Standard &
Poor's.
RATIONALE
In our view, the rating on Iraq is constrained by its war with the Islamic
State of Iraq and Syria (ISIS); political institutions that are in an early
stage of development; and sectarian divisions between the Sunni, Shia, and
Kurdish ethnic groups. ISIS controls large areas of the north and west of the
country including Iraq's second-largest city, Mosul. Nevertheless, crucially,
over 85% of Iraq's oil fields and production are located in the south of the
country close to Basra, the main port for crude exports. These are
Shia-controlled areas at some distance from the fighting. Our rating assumes
that the government will remain in control of these assets. They are the key
supports for the rating.
Iraq has the world's fifth-largest proven crude oil reserves and is the
second-largest oil exporter in the Organization of Petroleum Exporting
Countries (OPEC). Oil dominates the Iraqi economy, contributing over 90% of
government revenues and more than 95% of exports.
Iraq elected a new government, and in September 2014 Haider Al-Abadi took over
as prime minister. Mr. Abadi is viewed as more inclusive and secular in his
approach than his predecessor, which could help ease ethnic tensions. In
addition, Mr. Abadi has planned significant reforms including cuts in the size
of government.
After a contraction of 2.2% in 2014 and an estimated 0.3% growth in 2015, real
GDP growth is expected to rise to an average of 5.7% from 2016-2018, largely as
a result of the expansion of oil production. We think that Iraq's oil
production will reach about 5 million barrels per day (b/d) by 2018 (with
exports of about 4.5 million b/d), compared with around 3.1 million b/d in
2014. We expect domestic demand will remain weak for at least two years owing
to the war against ISIS and general societal uncertainty.
Military and humanitarian expenditure related to the ISIS war and the decline
of oil prices have hurt public finances. We project the general government
fiscal deficit will reach 18% of GDP in 2015 and 12% of GDP in 2016 from a
deficit of 5.5% of GDP in 2014. The widening deficit is planned to be partially
financed by up to US$6 billion in external borrowing, and by domestic issuance
taken up by state-owned banks. We note that the Iraqi government has recently
been able to get international financial support and access to funding from
multilateral institutions. For example, the IMF recently approved a "Rapid
Financing Instrument" of about US$1.24 billion.
We project that general government debt will average 65% of GDP in 2015-2018,
up from about 39% of GDP in 2014. Iraq's debt load previously benefited from an
80% haircut that the government negotiated with its Paris Club creditors in
2003-2004.
Iraq's current account has typically run a surplus owing to Iraq's large oil
exports. However, we expect the current account balance to fall into deficit in
2015 because of the sharp drop in oil prices. We forecast Iraq's current
account deficit to average 3% of GDP in 2015-2018, compared with an average
surplus of 10% of GDP in 2011-2014. We forecast narrow net external debt at
about 9% of current account receipts (CARs) during 2015-2018, and we estimate
average gross external financing needs as a percentage of CARs and usable
reserves at about 76%.
Inflation currently remains low, with consumer price inflation in the low
single digits (approximately 2.2% in 2014). We expect that the Central Bank of
Iraq (CBI) will maintain the dinar's peg to the U.S. dollar, albeit with minor
fluctuations. While this has helped control inflation, the peg limits the CBI's
monetary flexibility.
OUTLOOK
The stable outlook reflects our expectation that fiscal and external deficits
will not worsen beyond our forecasts and that the war with ISIS will be
contained. It also incorporates our forecast of a return to strong growth from
2016 onward owing to the projected increases in oil production and oil exports.
We could lower the ratings if these assumptions do not hold.
On the other hand, we could raise the ratings if Iraq's security situation
improves significantly and, with it, Iraq's public finances.
KEY STATISTICS
RATINGS SCORE SNAPSHOT
RELATED CRITERIA AND RESEARCH
Related Criteria
-- Criteria - Governments - Sovereigns: Sovereign Rating Methodology -
December 23, 2014
-- General Criteria: Methodology For Linking Short-Term And Long-Term
Ratings For Corporate, Insurance, And Sovereign Issuers - May 07, 2013
-- General Criteria: Methodology: Criteria For Determining Transfer And
Convertibility Assessments - May 18, 2009
Related Research
-- Default, Transition, and Recovery: 2014 Annual Sovereign Default Study
AndRating Transitions, May 18, 2015
In accordance with our relevant policies and procedures, the Rating Committee
was composed of analysts that are qualified to vote in the committee, with
sufficient experience to convey the appropriate level of knowledge and
understanding of the methodology applicable (see 'Related Criteria And
Research'). At the onset of the committee, the chair confirmed that the
information provided to the Rating Committee by the primary analyst had been
distributed in a timely manner and was sufficient for Committee members to make
an informed decision.
After the primary analyst gave opening remarks and explained the
recommendation, the Committee discussed key rating factors and critical issues
in accordance with the relevant criteria. Qualitative and quantitative risk
factors were considered and discussed, looking at track-record and forecasts.
The chair ensured every voting member was given the opportunity to articulate
his/her opinion. The chair or designee reviewed the draft report to ensure
consistency with the Committee decision. The views and the decision of the
rating committee are summarized in the above rationale and outlook. The
weighting of all rating factors is described in the methodology used in this
rating action (see 'Related Criteria and Research').
RATINGS LIST
Republic of Iraq
Sovereign credit rating
Foreign and Local Currency B-/Stable/B
Transfer & Convertibility Assessment B-
[You must be registered and logged in to see this link.]
