Moody's Maintains Iraq's Rating at "Caa1" with Stable Outlook

Moody's credit rating agency maintained its rating for Iraq's economy at the level of "Caa1" and maintained a stable outlook.

The agency said in its report, issued on Friday, that the classification comes in light of Iraq’s economic, financial and external dependence on the oil and gas sector, which leads to significant exposure to oil price fluctuations and the risks of the carbon transition.

High global oil prices prompted a major shift in Iraq's financial and external accounts, which supported the reduction of public debt and led to a noticeable recovery in the position of foreign exchange reserves at the Central Bank of Iraq to reach their highest levels ever, according to the agency's report.

Moody's said in its report that despite this, the presence of "a three-year expansionary budget and limited reform momentum will lead to a continuing and recent deterioration in financial indicators, as well as a deepening of Iraq's structural gaps." The agency also expected that the ceiling for local and foreign currencies would remain unchanged.

Last July, Moody's announced that it reduced the assessment of Iraq's economic strength to "ba2", and said that this assessment balances the size of the economy and the abundance of natural resources with instability and turmoil in economic growth, weak infrastructure, and the economy's lack of diversification.

Iraq is the second largest oil producer in OPEC, with an average of 4.5 million barrels per day, of which it exports about 3.4 million barrels, as the state relies on revenues from selling crude to cover about 95% of its expenses. The International Monetary Fund expected in a previous report that oil production in the country would shrink by 5% this year against the backdrop of the decision of the main members of OPEC+ to reduce production.

Moody's report issued yesterday expected that the escalation of the conflict between Israel and Hamas, regionally with the participation of Iran and the United States, which is a weak scenario currently according to the agency, would lead to material repercussions on Iraq, through a number of transmission channels.

The report added: “Any escalation in tensions in the Gulf would threaten to disrupt maritime transport routes through the Strait of Hormuz, on which Iraq depends for most of its oil exports.”

The dominance of oil in government revenues and exports will imply immediate and significant pressures on public finances and liquidity, with the overall impact depending on how long this disruption lasts.

Iraq's low reliance on external financing and the reserves provided by the recovery of foreign exchange reserves underscore a set of factors easing pressures on public finances.

Extremely weak governance of institutions constrains the effectiveness of policies, the government's ability to respond to domestic and external shocks, and the competitiveness of the economy.

Deep political division, Iraq's vulnerability to geopolitical tensions, and growing social pressures resulting from high youth unemployment and inadequate access to basic services, all expose Iraq to the risks of political events.

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