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Iraq Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 41 pages

Core Views

Islamic State (IS) will lose control of Mosul, its capital in Iraq, over the coming year, but will remain a threat to the country by going underground and carrying out terror attacks. Iraq will maintain formal unity within a fragile federalised state over the coming decade, with the Kurdish region retaining significant autonomy but not outright independence. Economic growth will turn positive again in 2017 in Iraq, after three years of recession. No boom is on the horizon however, given that major structural impediments remain.

Table Of Contents

Iraq Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Slow Economic Recovery From 2017............................................................................................................................................8
In 2017, the Iraqi economy will come out of the crisis in which it has been mired for the past three years. Improvements in the security
situation will result in a more conducive environment for private consumption, while the reconstruction of the country will provide
numerous investment opportunities. No boom is on the horizon however, given that low oil prices will continue to weigh on government
expenditure and that the country's manufacturing base remains virtually non-existent.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS....................................................................................................................................................9
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Fiscal Policy And Public Debt Outlook.................................................................................................................. 11
Deficits Manageable With International Assistance..................................................................................................................11
Substantial improvements in the oil sector in Iraq over the coming quarters will not prevent the country from still posting large budget
deficits in 2017 and 2018. To finance these, the Iraqi government will rely on a mix of domestic and international debt issuance,
international assistance and the central bank's dwindling foreign reserves.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................12
TABLE: BREAKDOWN OF REVENUES AND EXPENDITURE...............................................................................................................................13
External Trade And Investment Outlook................................................................................................................ 14
Current Account Deficit Narrowing Will Be Slow.......................................................................................................................14
Iraq's current account deficit will narrow only gradually over the coming quarters. Oil prices will remain too low to create a sudden
surge in export revenues, while the improving security situation in the country will lead to higher demand for foreign goods. The current
account deficit will be financed through reserves, and international assistance.
Outlook On External Position.................................................................................................................................. 15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................15
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................16
TABLE: BREAKDOWN OF IMPORTS.....................................................................................................................................................................16
TABLE: BREAKDOWN OF EXPORTS....................................................................................................................................................................16
Monetary Policy........................................................................................................................................................ 17
International Assistance Key To Maintaining The Peg..............................................................................................................17
The Central Bank of Iraq will keep its currency pegged to the US dollar over the coming quarters and this will provide some stability to
the economy amid elevated balance of payments and fiscal pressures. International assistance will be key for the CBI to maintain an
adequate level of foreign reserves to protect the peg.
Monetary Policy Framework.................................................................................................................................... 18
TABLE: MONETARY POLICY FORECASTS.......................................................................................................................................................... 18
Chapter 2: 10-Year Forecast................................................................................................................... 19
The Iraqi Economy To 2025..................................................................................................................................... 19
Success Story In Jeopardy..........................................................................................................................................................19
Iraq's potential as a regional economic outperformer has faded as a result of elevated political instability and we project real GDP
expansion by a yearly average of 3.1% over the 2016-2025 period. The oil and gas sector will be the lifeblood of the economy over this
time frame despite declining oil prices.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................19
Chapter 3: Political Outlook................................................................................................................... 21
SWOT Analysis......................................................................................................................................................... 21
BMI Political Risk Index........................................................................................................................................... 21
Domestic Politics..................................................................................................................................................... 22
Institutional Crisis To Worsen......................................................................................................................................................22
The dismissal of Finance Minister Hosh yar Zebari marks a clear escalation in Iraq's institutional crisis. The risk of seeing Prime Minister
Haider al-Abadi impeached will increase over the coming weeks and the uncertainty will benefit ousted prime minister Nuri al-Maliki,
who is leading the charge against the government. The crisis will weaken the Iraqi state even more, at a time when it is facing a severe
economic crisis and preparing for a decisive military campaign to retake Mosul from Islamic State.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................22
TABLE: POLITICAL CRISIS IN DATES...................................................................................................................................................................23
Long-Term Political Outlook................................................................................................................................... 24
Risks Of State Collapse: Scenarios Assessed...........................................................................................................................24
Iraq will maintain formal unity within a more fragile federalised state over the coming decade, but risks that the country will return to fullblown
sectarian civil war are high. We believe that Islamic State (IS) will be defeated by Iraqi forces with support from the United States
and Iran, but this will take several months given that IS is still well entrenched in the north of Iraq and still controls Mosul, the country's
second largest city.
TABLE: LONG-TERM SCENARIOS........................................................................................................................................................................25
Chapter 4: Operational Risk................................................................................................................... 27
SWOT Analysis......................................................................................................................................................... 27
Operational Risk Index............................................................................................................................................ 27
Operational Risk....................................................................................................................................................... 28
TABLE: OPERATIONAL RISK................................................................................................................................................................................. 28
Business Crime........................................................................................................................................................ 29
TABLE: BUSINESS RESPONSE TO RISK.............................................................................................................................................................30
Government Intervention......................................................................................................................................... 32
TABLE: PERSONAL INCOME TAX.........................................................................................................................................................................33
TABLE: BUSINESS TAXES.....................................................................................................................................................................................33
Chapter 5: BMI Global Macro Outlook................................................................................................... 37
Global Macro Outlook.............................................................................................................................................. 37
Broad Recovery But Three Notes Of Caution.............................................................................................................................37
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................37
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %.................................................................................................................................... 38
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...................................................................................................................................39
TABLE: IRAQ - MACROECONOMIC DATA and FORECASTS.................................................................................................................................41

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