Fitch revises Iraq's outlook at stable with IDR at "-B"

Shafaq News/ Fitch Ratings has revised the Outlook on Iraq's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'B-'.

The American credit rating agency said in a report issued today, Wednesday, "Policymaking remains hamstrung by political-economy dynamics, although an 18.5% devaluation of the Iraqi dinar and government approval of a white paper on fiscal and economic reforms indicate some potential for measures to place Iraq's finances on a more sustainable footing."

Iraq's rating is constrained by commodity dependence, weak governance, high political risk, and an undeveloped banking sector, while the rating is supported by high FX reserves and low interest costs on government debt

Fitch forecasts a budget deficit equal to about 5% of GDP in 2021, shrinking from an estimated 16.5% of GDP in 2020 because of higher oil prices and the devaluation, which will boost the local-currency value of oil exports by 5% of GDP, ceteris paribus. 

"There is considerable forecasting uncertainty because the 2021 budget is not finalised, amid widely differing proposals. In 2022, we forecast a similar deficit, as higher oil exports offset an oil price decline, while spending increases only marginally after strong growth in 2021."

Oil export revenue will grow by 75% in 2021, based on a 42% improvement in the Iraqi oil price to USD55 per barrel (bbl) (Brent crude at USD58/bbl), the devaluation and slightly higher export volumes.

"Government debt/GDP increased to 87% in 2020 from 48.5% in 2019, pushed higher by the budget deficit, a 25% decline in nominal GDP and the currency devaluation, which added close to 10pp to the government debt/GDP ratio. Foreign-currency debt includes an estimated USD40 billion of legacy debt stemming from the 1980s, which Iraq faces no pressure to service following its Paris Club agreement of 2004. Excluding this debt, overall government debt/GDP would have been around 60% at end-2020."

Fitch expects government debt/GDP to decline in 2021 to 74%, before increasing gradually towards 80% over the medium term, given a moderation in oil prices and increases in oil output and exports to 4.6 million b/d and 3.45 million b/d, respectively, in 2024.

International reserves remain substantial, at USD54 billion, despite declining by USD14 billion in 2020. We forecast reserves to stabilise in 2021 as stronger oil prices and the devaluation narrow the current account deficit (CAD), to 1.5% of GDP from 12.5% of GDP in 2020. However, we expect reserves to decline in 2022 to USD48 billion as lower oil prices and higher imports widen the CAD. Nonetheless, at 7.2 months of current external payments (CXP) in 2022, Iraq's reserves would remain stronger than the 'B' median ratio of 4.3 months of CXP and sizeable in relation to projected government debt amortisation of USD4.7 billion.