New York, July 30, 2019 -- Moody's Investors Service ("Moody's") has today
affirmed the Government of Iraq's long-term issuer and senior
unsecured ratings at Caa1 and maintained the stable outlook.
The decision to affirm Iraq's Caa1 ratings reflects credit challenges
posed by very weak institutions and governance that in Moody's view,
will continue to limit policy effectiveness, constrain the government's
capacity to respond to external and domestic shocks and weigh on the --
currently very weak - competitiveness of Iraq's economy.
The Caa1 rating level also captures Iraq's inherently very high
level of political risk, in part related to political strife which
will slow reform progress, hamper a strengthening of institutions
and contribute to maintaining very high fiscal, external and economic
vulnerability to potential declines in oil prices.
The stable outlook balances a number of potential positive and negative
drivers. Recent improvements in security are set against the country's
overall fragility given its deep political, ethnic and sectarian
fragmentation and rising social pressures. Similarly, recent
pledges of reconstruction assistance from the international community
could have significant credit positive effects; but the formidable
size of the task, which is exacerbated by very weak institutions
and the absence of a coherent medium-term reform agenda,
materially reduces the likely credit impact. And while the stable
outlook reflects potential economic and fiscal upside from the government's
plans to increase oil production in the medium term, it also takes
into account the near-term constraints from Iraq's commitment
to comply with the oil output cuts agreed by the Organization of Petroleum
Exporting Countries (OPEC) and generally weak investment absorption capacity.
Iraq's country ceilings remain unchanged. The foreign currency
bond ceiling is at B3, the foreign currency deposit ceiling at Caa2,
and the long-term local currency bond and deposit ceilings at B3.
RATINGS RATIONALE
RATIONALE FOR AFFIRMING THE Caa1 RATINGS
WEAK INSTITUTIONS AND GOVERNANCE ARE THE KEY CREDIT CONSTRAINT
In Moody's view, Iraq's rating will remain constrained
by weak institutions and governance that will limit the government's
capacity to implement reforms and respond effectively to external and
domestic shocks. This constraint has not been alleviated materially
over the past two years.
Iraq has made little progress on structural and legislative reforms that
would meaningfully strengthen its institutional framework, improve
policy effectiveness and enhance the government's policy implementation
capacity, all of which remain hampered by governance challenges
and pervasive corruption.
In particular, although Iraq has developed an anti-corruption
and anti-money laundering framework, and earlier this year
established a new High Council for Combatting Corruption, coordination
between the relevant government agencies and institutions remains weak,
which impedes effective implementation, supervision, and enforcement.
According to the most recent Worldwide Governance Indicators, Iraq
continues to rank among the weakest 10% of sovereigns rated by
Moody's with regards to rule of law, control of corruption,
and government effectiveness.
Moreover, most structural and fiscal reform measures committed under
the three-year IMF program, which expired in July 2019,
were either not enacted or reversed during the past two years.
This includes a reversal of spending cuts implemented in 2016-17,
no significant new non-oil revenue streams being introduced,
and no significant progress towards a stronger supervision and a comprehensive
restructuring of the banking system. Reforms of the public financial
management framework remain in initial stages.
Moody's believes that Iraq's banking system, dominated
by very weak state-owned banks, poses risks to Iraq's
financial stability and financial intermediation, and is a source
of government liquidity risks, given the sovereign's reliance
on the domestic banks for the rollover of its domestic debt, which
stood at 18% of GDP in 2018, nearly all of which is short
term. Impending recapitalization of state-owned banks also
presents a significant contingent liability risk for the sovereign.
In Moody's view, a new general financial management law,
which was approved in May this year, offers a prospect for more
effective fiscal policy. The new legislation mandates greater fiscal
transparency, constrains parliament's capacity to amend the
budget and limits scope for extrabudgetary spending. However,
in the absence of additional measures, including a comprehensive
overhaul of the public sector wage bill, current spending --
which is expected to rise around 20% in 2019 and accounts for nearly
half of total government spending -- will remain the key source of
fiscal pressure, especially if oil prices decline.
Weak institutions and implementation capacity challenges have delayed
post-war reconstruction efforts and slowed the execution of critical
public investment projects, including in the electricity sector.
This has contributed to sluggish non-oil growth, which was
only 0.8% in 2018, after a 0.6% contraction
in 2017. Furthermore, lack of new public investment in power
generation and poor maintenance of the electricity transmission grid has
led to frequent and lengthy power cuts which, along with rising
popular discontent with endemic corruption, poor delivery of public
services and insufficient job creation, triggered wide-spread
violent protests in the southern, oil-producing region of
Basrah during last summer. Such protests are likely to reoccur
until the deep issues of inadequate physical and social infrastructure
and rife corruption are addressed.
INHERENTLY VERY HIGH LEVEL OF POLITICAL RISK
In Moody's assessment, inherently high level of political
risk constitutes another formidable constraint on Iraq's rating,
which, in turn, impedes the strengthening of the country's
institutions.
Although the security situation in Iraq has improved appreciably since
the defeat of ISIS in 2017, as the government regained territorial
control over areas previously captured by the self-proclaimed jihadist
state, Iraq's domestic political and security risks remain
substantial. ISIS continues to operate in the rural areas of central
and northwestern Iraq, continues to stage small-scale terrorist
attacks across the country, and could re-emerge especially
if the government fails to improve the delivery of basic public services,
in particular in the Sunni-majority areas. Furthermore,
other militias periodically attack US and other foreign targets in Iraq,
raising risks for foreign investors, including international oil
companies.
Domestic political stability risks have been highlighted by the extended
stalemate following the May 2018 elections; it took more than one
year to appoint all the members of the cabinet due to deep fragmentation
of the political landscape along ethnic and sectarian lines and the rise
in prominence of populist political movements in parliament. Delays
in government formation have prevented the completion of IMF program reviews
since August 2017, while rising pressures to increase social spending
have translated in a significantly expansionary budget for 2019,
reversing the previous year's fiscal consolidation.
Iraq is also significantly exposed to multiple geopolitical risks.
Rising geopolitical tensions in the Gulf threaten disruptions to the maritime
transport routes through the Strait of Hormuz, on which Iraq depends
for most of its oil exports. The rising tensions could also complicate
progress on urgent energy reforms, which require participation of
foreign companies, as well as post-war rebuilding efforts.
Furthermore, the US (Aaa stable) sanctions on Iran present a direct
challenge given Iraq's significant reliance on Iranian imports,
including electricity and natural gas for power generation. Finally,
the risk of spillovers from the continuing instability in Syria remains.
HIGH VULNERABLITY TO POTENTIAL DECLINES IN OIL PRICES
Moody's expects that Iraq's fiscal and external position will
remain highly vulnerable to potential oil price declines.
Although Iraq's fiscal and external balances improved significantly
in 2018, this was almost entirely due to higher oil prices without
any structural improvement that would reduce the impact of future possible
falls in oil prices. Moody's estimates that a $10/barrel
decline in oil prices would lead to a 4-5% of GDP deterioration
in Iraq's fiscal and external positions. A persistent fall
of the same magnitude would increase Iraq's government debt by close
to 30% of GDP over five years above Moody's current expectations
that assume that oil prices will fluctuate between $50-70/barrel
in the medium term. Similarly, such an oil price decline
would also erode Iraq's foreign currency reserves and significantly
increase government liquidity pressures, given the sovereign's
lack of established international capital market access and the absence
of meaningful fiscal buffers accumulated during the periods of higher
oil prices.
In the absence of new measures, Moody's expects that Iraq's
vulnerability to oil price fluctuation will increase in the next several
years. This is primarily due to the reversals of the fiscal consolidation
efforts during 2018-19 that, according to the IMF,
will increase Iraq's fiscal and external breakeven oil prices (the
prices that balance the government's budget and current account)
above $60/barrel for Brent during 2019-2020.
Iraq's breakevens could decline if the government's plans
to increase crude oil production capacity by around 2 million barrels
per day (mbpd) to 6.5 mbpd by 2028 translate into higher actual
production levels. However, Moody's expects that Iraq's
compliance with OPEC production restraint and, over the more medium
term, investment implementation delays will reduce the government's
ability to make significant progress towards its ambitious production
targets.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook balances a number of potential positive and negative
drivers.
The stable outlook reflects a balance between the recent improvement in
the security situation and the fragility of the country's overall
political, economic, and fiscal position.
Financial pledges from the international community to support Iraq's
immediate reconstruction needs are balanced against the formidable size
of the task at hand and other long-standing socio-economic
challenges, exacerbated by very weak institutions and the absence
of a coherent medium-term reform agenda.
Potential fiscal and economic upside from the planned increases in oil
production capacity will be constrained by the limited scope to actually
increase production in an environment of moderate oil prices given Iraq's
membership of the Organization of Petroleum Exporting Countries (OPEC)
and its obligation to adhere to OPEC production restraint agreements,
the latest of which was extended until March 2020.
WHAT COULD CHANGE THE RATING UP
Over the medium term, signs that Iraq's institutions are strengthening,
with material improvement in governance, control of corruption and
management of public finances would likely lead to an upgrade.
Such improvements would likely point to strengthening the sovereign's
fiscal metrics, independent of fluctuations in oil prices,
reflecting the implementation of structural measures that reduce and enhance
the effectiveness of spending.
An improvement in Iraq's institutions would likely happen in the
context of easing political and geopolitical tensions that Moody's
expect to last.
WHAT COULD CHANGE THE RATING DOWN
Given the already low rating, a downgrade would likely reflect Moody's
view that default risks and the related losses for investors were rising.
This would be most likely to arise in the case of a worsening in the government's
fiscal position significantly beyond Moody's current expectations,
potentially due to rising social and reconstruction spending pressures.
A material increase in domestic political tensions and/or violence that
would threaten to disrupt oil production and interfere with the government's
ability to collect revenue and service its debt would also increase the
likelihood of a downgrade.
GDP per capita (PPP basis, US$): 17,659 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 0.6% (2018 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): -0.1%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: 6.2%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 5.7% (2018 Actual) (also
known as External Balance)
External debt/GDP: 30.5% (2018 Actual)
Level of economic development: Very Low level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 25 July 2019, a rating committee was called to discuss the rating
of the Iraq, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutional strength/ framework, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has materially decreased. The issuer's susceptibility to event
risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
The local market analyst for this rating is Alexander Perjessy ,
+971 (423) 795-48.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
David Rogovic
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
