Credendo downgrades Iraq from 6 to 7 for medium- to long-term political risk
Shafaq News/ Credendo has downgraded Iraq's short and medium-to-long term political risk to 7, a report by the Belgium-based credit insurance group showed this week.
"Iraq is in a tight spot amid the US-Iran rivalry," the report said. "A key vulnerability for Iraq is its critical dependence on both powers – the country depends on Iran for its energy supply and on the USA for its security."
Iraq also relies on the USA to access its foreign exchange reserves, which are partially stored at the Federal Reserve. Since the end of 2022, the US authorities have restricted transfers of foreign exchange reserves to Iraq and have banned several banks from conducting operations in USD to curb suspicious financial flows to Iran and Syria. "As highlighted by the US decision to restrict USD transfers, Iraq’s balancing act between the two arch-enemies is very challenging," the report read.
"The Hamas-Israel conflict and the related tensions between the USA and Iran only complicate Iraq’s position," it added. "In this precarious context, the Hamas-Israel conflict risks destabilising the country. The deterioration of the humanitarian situation in Gaza could inflame even more the high domestic social discontent and lead to violent protests."
Since the outbreak of the war, Iran-backed paramilitary groups have been targeting US interests in the country. Initially, the USA abstained from retaliating directly on Iraqi territory, but since the end of November, the US army started targeting Iran-backed militias directly in Iraq.
"This US strategical shift represents a significant escalation, as US attacks are perceived by the Iraqi government as a violation of the country’s sovereignty and is exacerbating discontent over the presence of US troops in the country."
Recently, the Iraqi government declared its intention to remove the international coalition to fight ISIS from its territory. "This incandescent situation exposes Iraq to a variety of risks, such as the imposition of additional and more severe sanctions, more restricted access to foreign exchange reserves, but also to the escalation of social unrest and insecurity."
"In a worst-case scenario, Iraq could even be exposed to more severe military retaliation from the USA and/or Israel," the report continued.
"The economic activity, public finances and current account receipts are overreliant on the hydrocarbon sector, which leads to significant macroeconomic volatility. A situation that is further exacerbated by procyclical policies."
"Looking ahead, despite the urgency to diversify the oil-dependent economy, as oil demand is set to peak, no concrete measures have been taken so far. Moreover, the approved three-year expansionary fiscal budget is expected to add to the country’s economic woes by putting renewed pressure on public finances."
According to estimates, Iraq would run large overall fiscal deficits under the new budget, starting from next year. The expansionary fiscal policy is expected to lead to a surge in public debt levels, from 44.9% of GDP in 2022 to 61.4% of GDP in 2025 – which are important levels for a country with weak macroeconomic fundamentals.
"More worryingly, the public wage bill is expected to increase significantly given a projected increase in public sector hiring. It is worth noting that Iraq already has one of the highest levels of public employment in the whole region. In this perspective, the plan, besides increasing the vicious cycle of economic dependency on hydrocarbon markets, could further complicate the ability of Iraqi authorities to implement structural fiscal reforms without fuelling social tension."
The report said that "heightened regional tensions" could further destabilise the country as they "fuel social unrest, increase insecurity and political instability and expose the country to far-reaching retaliatory measures by the USA and/or Israel."
"Credendo therefore decided to downgrade Iraq’s ST and MLT political risk classifications to category 7," it concluded.
