August 11, 2015
Fitch Ratings issued its first rating on Iraqi
sovereign debt, giving it the fifth-worst junk grade, due in part to the
cost of the civil conflict and the global slump in oil prices.
The rating comes as the country is planning a $5-billion bond issue towards the end of this year.
The international ratings agency has assigned Iraq a Long-term
foreign currency Issuer Default Rating (IDR) of ‘B-‘ with a Stable
Outlook.
The agency has also assigned a Country Ceiling of ‘B-‘ and a Short-term IDR of ‘B’.
KEY RATING DRIVERS
The ratings reflect the following factors:
Political risk and insecurity are among the highest faced by any
sovereign rated by Fitch. Sectarian conflict has raged with varying
intensity since 2003, ISIS militants currently effectively hold three of
the 18 provinces, relations with the Kurdish regional government are
volatile and governance indicators are exceptionally weak.
Iraq holds the world’s fifth largest oil reserves and significant
amounts of gas. Oil production has risen rapidly to 3.3m b/d in May
2015, from an average of 2.4m b/d in 2010, with Iraq becoming the
world’s second largest exporter in 2014. Production costs are low. The
bulk of oil production facilities and infrastructure are away from areas
of domestic insecurity. Investment is under way to further raise
production capacity, although infrastructure bottlenecks remain a
constraint and investment plans were set back by payment arrears in
2014.
Iraq’s fiscal position has deteriorated rapidly since 2013 and Fitch
forecasts a double-digit fiscal deficit for 2015, owing to lower oil
prices, higher military spending and costs associated with civil
conflict. Savings buffers built during previous years of high oil prices
have been largely eroded and the deficit will be financed by debt,
likely including a eurobond and funding through an IMF rapid financing
instrument that was approved in July. Rising oil production and prices
should lead to a narrowing of the budget deficit in 2016, although it
will remain large and another more substantive IMF programme is likely
in 2016. We forecast a small deficit for 2017. The government has
cleared the USD9bn of payment arrears to international oil companies
that were run up in 2014.
Government debt is forecast by Fitch at 51% of GDP at end-2015, in
line with the ‘B’ range median and sharply up on the end-2014 level
owing to deficit financing and a contraction in nominal GDP. Debt/GDP is
forecast to peak in 2016. Debt reflects the inclusion of funds (and
accumulated interest) provided by GCC countries during the 1980-1988
Iran-Iraq war amounting to 22% of estimated 2015 GDP. Iraq faces no
pressure to repay the GCC debt, which has not been subject to a haircut
of 80% in line with terms to the Paris Club (in a 2004 restructuring
covering debt under the pre-2003 regime).
http://www.iraq-businessnews.com/2015/08/11/fitch-rates-iraqi-debt-as-junk/
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