New government unlikely to meet expectations for reform in Iraq

22 November 2018

Iraq has appointed a new president and prime minister, bringing months of political gridlock to an end. However, the country’s new government is unlikely to meet expectations for reform. The number of terrorist attacks by Islamic State (IS) decreased in 2017, but protests in southern Iraq over inadequate public services pose a risk of business interruption.

SECURITY ENVIRONMENT

After five months of stalemate following inconclusive parliamentary elections, Iraq’s parliament appointed Barham Saleh to the largely ceremonial role of president in October 2018. Saleh has named Adel Abdul Mahdi, an independent candidate and former vice-president, as prime minister.

Abdul Mahdi has been tasked with forming a cabinet. However, his government will be constrained by its dependence on the country’s main political parties, and the risk of civil unrest will remain high. Since July 2018, a series of large protests have taken place in southern Iraq over inadequate public services provision and corruption. In September 2018, protesters set fire to government buildings in Basra and blocked access to the nearby port of Umm Qasr for around 48 hours. Ports, water treatment facilities and power and oil infrastructure in southern Iraq are potential targets for protest action. While mostly non-violent, demonstrations will pose a significant risk of business interruption in the one-year outlook.

IS has lost its territorial foothold in Iraq and the number of terrorist attacks decreased in 2017. However, IS continues to conduct frequent terrorist attacks in the centre and northwest of the country. Commercial assets in the south of Iraq and in Iraqi Kurdistan face a less acute risk of terrorism, but oil installations will remain targets for IS.

TRADING ENVIRONMENT

Iraq’s economy will be buoyed by rising oil prices and production, and year-on-year real GDP growth is forecasted at 2.8% in 2018 and 5.1% in 2019. As production rises at the Halfaya and Mainoon fields, Iraq’s crude oil production is forecasted to rise by almost 5% in 2019, averaging 4.9 million barrels per day.

As a result, government debt-to-GDP is forecasted to fall from 60.1% in 2017 to 49.9% in 2018, while Iraq’s fiscal deficit is forecasted to fall to 2.3% of GDP in 2019. However, oil accounts for almost 90% of government revenues, and Iraq’s economic and fiscal position is therefore highly exposed to any downturn in oil prices. The new government’s support base in parliament is expected to be highly fragmented, and this is likely to complicate reaching agreement on economic reform.

Foreign-exchange reserves are strong, at USD 48.9 billion by the end of 2017, equivalent to 8 months of current external payments. Iraq is likely to maintain the dinar’s peg to the US dollar, but it could be undermined by a prolonged period of low oil prices.

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INVESTMENT ENVIRONMENT

Iraq’s reconstruction requirements are estimated at USD 100 billion, and the new government is likely to increase investment in ports in addition to power and oil infrastructure. Due to Iraq’s dependence on foreign investment in the oil industry, the risk of expropriation for international companies is low. However, there is a significant risk of contract alteration, as Baghdad has previously threatened to cancel the contracts of firms exporting oil from the semi-autonomous Kurdistan region without its permission.

Saleh’s election as a candidate for the Patriotic Union of Kurdistan (PUK) ended the party’s power-sharing agreement with the Kurdistan Democratic Party (KDP). Rivalries between the two parties will therefore increase the risks of non-payment for contracts signed with the Kurdish Regional Government (KRG). Tensions between the PUK and KDP are also likely to undermine the KRG’s ability to present a united front in its negotiations with Baghdad. A failure to secure a larger proportion of Iraq’s federal budget would undermine Kurdistan’s ability to pay oil producers and creditors.

Pricing Table Iraq
* Underwriters remarked that capacity is very constrained
†† Pricing would be dependent on the location. A number of insurers are unwilling to write these risks in some parts of the country

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Iraq, Egypt, Qatar and United Arab Emirates all of which have been the subject of recent enquiries from JLT's client base.

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The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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For further information, please contact Mark Wong, Managing Director of Credit, Political and Security Risks at mark_wong@jltasia.com.

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