Fitch: IMF Deal Supports Iraq in Face of Multiple Challenges

by **wciappetta** Sat 21 May 2016, 6:18 am

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Fitch: IMF Deal Supports Iraq in Face of Multiple Challenges

by wciappetta Sat 21 May 2016, 6:18 am

20 MAY 2016 9:22 AM EST

Fitch: IMF Deal Supports Iraq in Face of Multiple Challenges

Fitch Ratings-London-20 May 2016: The staff-level agreement between Iraq and the IMF for a three-year Stand-By Arrangement (SBA), under which Iraq could access USD5.4bn of financial assistance, is credit positive, Fitch Ratings says.

The deal is likely to pave the way for further international support and may enable the government to issue international bonds. This will provide some support to Iraq's finances as the country faces sharply lower oil revenue, ongoing conflict with the Islamic State (IS) group and a political crisis that has paralysed parliament and led to mass protests.

Engagement with the IMF could bring some improvements to economic policymaking and management. Following on from the Staff-Monitored Program agreed in November, the SBA is likely to set benchmarks related to budget spending levels, non-accumulation of arrears and various fiscal reforms, as well as strengthening the government's cash management.

The twin shocks of sharply lower oil prices and the conflict with IS have severely damaged Iraq's financial position. We project the budget deficit in 2016 to widen to 15% of GDP - around USD22bn, assuming crude exports marketed by the central government remain around 3.3 million b/d and the government makes modest spending cuts. The government has also built up arrears.

Lower oil revenue is also causing a balance-of-payments shock. The central bank's stock of foreign reserves (including gold) has fallen from USD78bn at end-2013 to around USD50bn currently. This is still a robust level, at around nine months of current external payments, but is set to fall further this year and next.

Disbursements under the SBA and the further foreign assistance that is likely to follow will be a source of additional finance, but cannot mask the challenges Iraq faces. Oil revenue accounts for more than 90% of budget revenue and current external receipts. Government expenditure increased rapidly before the oil price collapse in 2014, creating a fiscal breakeven oil price above USD100/barrel.

Full implementation of the SBA will prove challenging. Wide-ranging fiscal reforms that would put Iraq's finances back on a sustainable footing would require tackling a bloated civil service (the government accounts for 40% of total employment), a troubled banking sector, and serious weaknesses in governance.

Iraq's political challenges have vividly played out in Baghdad in recent months. In February, Prime Minister Haider al-Abadi announced his intention to appoint a new technocratic government, but has been unable to do so as various parties seek to protect their influence. Meanwhile, large protests culminated in the storming of the previously unviolated Green Zone and parliament itself. This situation remains unresolved and presents a risk of further political instability and violence. Progress has been made in retaking territory from IS, but it still holds significant parts of the country, and continues to present a major threat.

We affirmed Iraq's 'B-' Long-Term Foreign-Currency Issuer Default Rating in March, and revised the Outlook to Negative from Stable as lower oil prices lead to a significant deterioration in Iraq's financial position. We said at the time of the Outlook revision that international support, including from the IMF, was likely.

Contact:

Toby Iles
Director
Sovereigns
+852 2263 9832
Fitch (Hong Kong) Limited
68 Des Voeux Road Central
Hong Kong
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An international bond is a debt investment that is issued in a country by a non-domestic entity. International [You must be registered and logged in to see this link.] are issued in countries outside of the United States, in their native country's currency. They pay interest at specific intervals, and pay the principal amount back to the bond's buyer at maturity.

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