Iraq: Risk Assessment

Country Rating¹

Rating: D

Business Climate Rating¹

Rating: D

Risk Assessment²

Economic development dependent on security situation and oil prices
Economic conditions dependent on developments in the oil sector and the security situation
GDP growth is expected to accelerate in 2011, a forecast nonetheless essentially dependent not only on the trend in oil prices and production but also on a security situation that varies - as does its impact on the economy - widely by region. In regions facing less severe political and religious tensions as is the case for Kurdistan and provinces in the South and West, strong economic growth will be possible, while some regions in the Centre and the East will continue to suffer from weaker growth.

Public finances and external accounts still very shaky
Although trending up, revenues from hydrocarbon exports will not suffice to prevent a continuing large fiscal deficit in view of the scale of the county's needs. To avoid an excessive weakening of its financial position, Iraq approved a new stabilisation agreement with the IMF in February 2010. And the debt relief granted by Paris Club public creditors - cancelation of 80% of the stock of debt with the balance rescheduled from 2011 - is supposed to bring debt ratios down to more sustainable levels.
Despite the forecasted rise of oil exports, growing demand for imported capital goods and consumer durables will likely cause the current account deficit to remain large - albeit growing smaller. In view of the lack of foreign direct investment, however, Iraq will likely be compelled to take on foreign debt, but mainly long-term loans given its lack of access to financial markets. Meanwhile, the country benefits from relatively large foreign exchange reserves and the dinar's unofficial dollar peg. Given the extent of the political uncertainties affecting foreign direct investment and Iraq's capacity to raise capital, liquidity crisis risk has remained high.

A political and security situation and a business environment in critical shape
The delayed formation of a government late 2010 with the Prime Minister Nouri al-Maliki returned to office after the March 2010 legislative elections is attributable to the difficulty of integrating the Sunni minority in a Shiite-dominated coalition. In any case, normalisation of the situation will largely depend on the resolution of critical issues involving the hydrocarbon law, the status of Kirkuk, and the sharing of wealth.
Although the security climate has improved since the chaos that prevailed in 2006 and 2007, a resurgence of violence will remain a possible concomitant of the gradual withdrawal of American military forces through end 2011.
In such conditions the business environment remains critical while institutional weaknesses and the limited efficiency of an administration that has proven permeable in the struggle for political, religious, and regional influence could affect payments and debt collection.

Strengths

• The country has plentiful natural resources (oil and gas)
• Debt relief and a moratorium enable Iraq to start fresh on a more sustainable basis
• International aid expected to support reconstruction efforts

Weaknesses

• Economy dependent on hydrocarbon revenues
• Twenty years of war and trade embargos and seven years of chaos have drained the economy of its lifeblood and left the country’s infrastructure destroyed
• Ethnic and religious disparities have complicated the process of establishing the rule of law and heightened the risk of civil war
• Insecurity and institutional weaknesses have delayed reconstruction and deterred investment