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Iraq Business Forecast Report Q1 2015

  • November 2014
  • -
  • Business Monitor International
  • -
  • 37 pages

Core Views

R isks of a return to full-blown civil war are elevated following the takeover of jihadist group Islamic State (IS) of the country's north and west.
R obust headline growth of the Iraqi economy in 2014 and 2015 will result from accelerating oil exports. Conversely, domestic expansion will be sluggish and uneven; consumer spending and capital formation will be hit hard by political instability, and declining oil prices will hinder the government's ability to prop up spending.

Major Forecast Changes

Iraq's current account surplus will narrow significantly in 2015 as declining oil prices will hit the value of hydrocarbons exports. We forecast Iraq's current account to come in surplus of 6.5% of GDP in 2015, from our previous forecast of 10.0% of GDP and compared to surplus of 10.7% of GDP in 2014.

Table Of Contents

Iraq Business Forecast Report Q1 2015
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Index 7
Domestic Politics 8
New Government Short Of A Game Changer 8
The formation of a new Iraqi government will lower risks of a collapse of central authority, and we have increased the country's Short-
Term Political Risk score as a result. However, the cabinet will fail to win trust from the Sunni minority, and jihadist group Islamic State
will remain a resilient fighting force. Although relations with the Kurds will improve, risks that Erbil will push for full independence over
the coming years remain salient.
Table: Political Overview 8
Long-Term Political Outlook 9
Rising Risk Of State Collapse - Scenarios Assessed 9
Iraq will maintain formal unity within a more fragile federalised state over the coming decade, but risks that the country will return to
full-blown sectarian civil war are high. The situation in Iraq and in neighbouring Syria will remain the major risk to systemic stability in the
Middle East over the coming years.
Table: Long-Term Scenarios 10
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Index 13
Economic Activity 14
Sluggish Domestic Growth Over The Next Five Years 14
Robust headline growth of the Iraqi economy in 2014 and 2015 will result from accelerating oil exports. Domestic expansion will be
sluggish and uneven; consumer spending and capital formation will be hit hard by political instability, and declining oil prices will hinder
the government's ability to prop up spending. Decelerating exports, the result of a lack of investment as oil prices decline, will result in
declining GDP growth from 2016 onwards.
Table: Economic Activity 14
Fiscal Policy 16
Resolution In Sight For Baghdad-Erbil Salary Payments Row 16
The resolution of a dispute between Baghdad and Irbil on salary payments for Kurdistan public employees will lead to the approval
of the 2015 budget. Iraq's fiscal surplus will narrow over the next five years as declining oil export growth hits government
revenues.
Table: Fiscal Policy 16
Monetary Policy 18
Inflation To Accelerate In 2015 18
Consumer inflation in Iraq will accelerate gradually over 2015 in areas under central government control, and spike dramatically in
regions under the control of jihadist group Islamic State. We project CPI inflation in areas governed by Baghdad to average 3.5% in
2014 and 4.5% in 2015, compared to 1.8% in 2013.
Table: Monetary Policy 18
Balance Of Payment 20
External Position Worsening As Oil Prices Decline 20
Iraq's current account surplus will narrow significantly from 2015 onwards, as oil prices are weak and crude production growth slows.
Foreign direct investment inflows will also fall sharply, as the challenging operational environment and elevated political risks hinder
confidence. Low oil prices will hit FDI in the oil sector, particularly in southern Iraq.
Table: Current Account 20
Chapter 3: 10-Year Forecast 23
The Iraqi Economy To 2023 23
Success Story In Jeopardy 23
Iraq's potential as a regional economic outperformer has faded as a result of elevated political instability, and we project real GDP
expanding by a yearly average of 4.3% over the 2014-2023 period. The oil and gas sector will be the lifeblood of the economy over this
timeframe despite declining oil prices.
Table: Long-Term Macroeconomic Forecasts 23
Chapter 4: Operational Risk 25
Operational Risk Index 25
Remaining Opaque 25
Operational Risk 26
Table : Ope ratio nal Risk 26
Transport Network 27
Table : MENA Transpo rt Netwo rk Risks 28
Economic Openness 30
Table: MENA - Economic Openness 31
Table: Exports, 2007-2012 32
Table: Imports, 2007-2012 32
Chapter 5: BMI Global Assumptions 35
Global Outlook 35
Reality Check: Uncertainty Reigns 35
Table: Global Assumptions 35
Table: Developed States, Real GDP GrowtH, % 36
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 36
Table : Eme rgi ng Markets , Real GDP Growt h, % 37

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