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Fitch Ratings revises outlook on Iraq to stable from negative

Fitch Ratings has revised its outlook on Iraq’s sovereign debt to stable from negative while maintaining its B- credit rating.

The agency cited higher oil prices and a smaller than expected decline in foreign reserves following the recent devaluation of the Iraqi dinar.

“We forecast a budget deficit equal to about 5 per cent of gross domestic product in 2021, shrinking from an estimated 16.5 per cent of GDP in 2020,” the ratings agency said on Wednesday. “In 2022, we forecast a similar deficit, as higher oil exports offset an oil price decline, while spending increases only marginally after strong growth in 2021.”

Iraq, Opec’s second-largest producer, depends on oil revenue to meet 90 per cent of government expenditure. Oil export revenue is expected to grow by 75 per cent in 2021, on the back of higher prices and increases in crude exports as Opec+ eases production cuts on the back of strengthening demand.

Fitch expects average oil production in 2022 to grow to 4.4 million barrels per day, from 4.1 million bpd in 2021, and federal oil exports to reach 3.3 million bpd, from 3 million bpd in 2021.

“Iraq’s budget revenue sensitivity to oil price and volume is significant. A $5 per barrel increase in the oil price leads to a 3 per cent of GDP rise in government revenue, and 250,000 barrels per day of exports equate to 3 per cent of GDP.”

Oil prices are currently trending higher as Opec and its allies, including Russia, implement production cuts to balance oil markets.

Iraq devalued its currency by about 23 per cent against the US dollar in December to support its economy.

International reserves remain substantial, at $54 billion, despite declining by $14bn in 2020. The ratings agency forecasts reserves should stabilise in 2021 as stronger oil prices and the devaluation narrow its current account deficit to 1.5 per cent of GDP from 12.5 per cent of GDP in 2020.

Non-oil revenue is also forecast to increase, on the back of “progressive pay roll tax reform, a 10 per cent flat tax on pensions and new excise and sales tax on alcohol, tobacco and vehicle sales”.

Spending, however, is expected to hike 28 per cent to 113 trillion dinars ($77.4bn) in 2021 as salary and pension bills increase due to commitments made by the previous government, it said.

A “failure to curb government spending would raise the risk of further devaluation of the currency over time or erosion of foreign reserves, depending on the course of oil prices”, the agency said.