Moody’s Investors Service has said that Iraq’s credit profile of Caa1 is supported by the country’s “ba2” economic strength, reflecting, “the balance of strong growth potential associated with large natural resource endowment against low competitiveness and the significant loss of productive capacity and infrastructure after many years of armed conflict“.
Iraq’s (Caa1 stable) credit challenges include very weak institutions and governance that limit policy effectiveness, constrain the government’s capacity to respond to external and domestic shocks and weigh on economic competitiveness, Moody’s Investors Service said in a report this week.
It says last year’s improvement in the fiscal and external balances was almost entirely due to higher oil prices without any structural improvement that would reduce the impact of future possible falls in oil prices. Iraq also faces very high levels of political event risk.
Moody’s Investors Service has 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.
Iraq opened the books yesterday on its first independent bond sale in a decade.
“Investor demand was huge,” writese Marcus Ashworth at Bloomberg. “The deal was seven times oversubscribed.”
The $1-billion, dollar-denominated bond, maturing in March 2023, was expected yield 7 percent, but demand enabled that to be cut to 6.75 percent.
In January, Iraq raised $1 billion of five-year bonds, guaranteed by the United States, at a coupon of 2.149 percent, but this latest bond is not guaranteed and depends on Iraq’s own creditworthiness. It is rated B- by both S&P and Fitch.
Iraq appointed Citi, Deutsche Bank and JP Morgan as joint bookrunners for the issue.
Meanwhile, the yield on the Iraqi 10-year bond (2028) has fallen from 9.3 percent in November to 6.7 percent.
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 Country Ceiling has been affirmed at ‘B-‘ and the Short-Term Foreign-Currency IDR at ‘B’.
KEY RATING DRIVERS
The revision of the Outlook reflects the following key rating drivers:
Iraq’s fiscal position has improved relative to 2015 and 1H16 because of higher than expected oil prices and reduced government spending. We estimate that the budget deficit narrowed to IQD16.5trn or 8.1% of GDP in 2016, from 12.3% of GDP in 2015. The IMF programme agreed in July 2016 is providing a useful policy framework and has helped Iraq’s financing options. However, progress has been slow in a number of areas including surveying arrears, in part due to capacity constraints.
In 2017 we forecast that the deficit will narrow further, to 5.1% of GDP, with higher average oil prices driving strong revenue growth. We incorporate non-oil revenue of IQD8trn (the IMF assumes IQD10.5trn). On the spending side, we forecast 12.1% growth in expenditure after three years of substantial spending declines.
Financing needs will therefore be lower in 2017 and the authorities expect to rely less on indirect monetary financing by the CBI. External financing will play a more dominant role, with funds from the IMF, World Bank, bilateral project loans, a USD1bn Eurobond (with a 100% US guarantee) issued in January and another planned for later in 2017 (without a guarantee). For 2018, Iraq still needs to identify sources of funding to plug the financing gap calculated by the IMF and will likely again focus on external financing.
Identified arrears totalled IQD12.5trn (USD10.6bn or 6.1% of 2016 GDP) at end-June 2016. In October the IMF expected around IQD6.5trn of these arrears to be repaid in 2016 (including most external arrears) and these are included in 2016 spending estimates. The remaining identified domestic arrears are to be repaid in 2017-19 after they have been audited.