Moody s NR / S&P B- / Fitch B- 1 Economy: Agriculture 5%, Industry 37%, Services 58%

Transcription

1 Iraq Summary Moody s NR / S&P B- / Fitch B- 1 Economy: Agriculture 5%, Industry 37%, Services 58% Iraq is a major oil exporter and has the fifth largest proven oil reserves in the world. Despite the political and security situation, Iraq continues to attract foreign companies for oil exploration. The fiscal and external sectors are highly dependent on oil, and the sharp price drop led to a large fiscal deficit, which prompted Iraq to engage with the IMF. The IMF program will help Iraq adjust to lower oil prices and ensure debt sustainability. Despite rising debt levels, Iraq s financing profile remains strong as most of its debt is owed to bilateral and multilateral institutions, and it only has two sovereign debt issues outstanding. Oil output has risen over the past couple years and, despite recent setbacks, is projected to continue expanding, although Iraq needs to improve infrastructure to achieve this. Even though political tensions remain high in light of the Syrian conflict and the emergence of the Islamic State (ISIS), the economic impact has thus far been insignificant because the violence has not materially affected oil production, which is concentrated in the south and west of Iraq, far from most sectarian violence in northern Iraq. Economic Indicators F 2018F Population (Millions) GDP per Capita (USD) 7,022 6,517 4,869 4,533 4,958 5,091 Nominal GDP (USD Billions) Real GDP (%) Year-End CPI (%) Fiscal Balance (% of GDP) Interest (% of Revenues) FC Debt/Public Debt (%) Government Debt (% of GDP) Government Debt (% of Revenue) Current Account (% of GDP) FDI (% of GDP) External Debt (% of GDP) Foreign Reserves/External Debt (%) Foreign Reserves (Mo. of imports) Foreign Reserves (% of GDP) As of November 2017 Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Source: Lazard, Citibank, Haver Analytics, IMF 487

2 Lazard Emerging Markets Debt Rating History Below is a history of the country s foreign and local currency ratings by the major agencies dating back to We have also included a chart of the country s hard currency external debt spread and the JP Morgan EMBI Global Diversified Index spread for comparison. Rating History Hard Currency B Local Currency B B- B- CCC+ CCC+ CCC CCC Moody s S&P Fitch Moody s S&P Fitch As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: Bloomberg, Fitch, Moody s, Standard and Poor s Bond Spreads Iraq 2012 EMBIGD 2017 As of December 2017 Performance represents past performance. Past performance is not a reliable indicator of future results. Source: JP Morgan 488

3 Iraq Strengths Vast Oil Reserves The potential to develop oil reserves in Iraq remains significant, as only about 20 of 80 oil fields have been developed. BP estimates proven reserves at 153 billion barrels, the fifth largest in the world, 2 while geologists and independent consultants have estimated that areas that have not yet been explored could contain an additional 60 billion to 160 billion barrels. 3 For comparison, Venezuela, which has the world s largest proven reserves, holds 300 billion barrels. The US Energy Information Administration estimates that the cost to bring production online is among the lowest in the world because of Iraq s geology, with extraction costs averaging US$9 per barrel. 4 Today, the majority of output comes from three major oil fields: Rumaila, West Qurna, and Az Zubair. The country is now opening up to a host of international oil producers to explore proven reserves, with partners such as ExxonMobil and Royal Dutch Schell. Official plans are to ramp up production from the current 4.2 million barrels per day (bpd) 5 to 5.5 to 6 million bpd by Regardless of how ambitious these plans might be, the trend for output and exports is much more likely to go up than down, even under conservative scenarios and despite the disruptions due to either violence in the north or equipment upgrades. Total oil production in Iraq was 4.47 million bpd as of October This marks a significant increase in output since the end of 2010, when Iraq produced 2.3 million bpd. 8 Iraq has not seen this level of output since 1979, the year prior to the war with Iran. Even though political tensions remain high in light of the Syrian conflict and the emergence of the Islamic State (ISIS), the economic impact has thus far been insignificant because the violence has not materially affected oil production, 80% of which is concentrated in the south and west of Iraq, far from most sectarian violence in northern Iraq. Strong Ability to Pay Iraq s debt structure is heavily skewed toward official debt, both bilateral and multilateral, with long maturities and very low interest rates. Paris Club creditors provided debt relief to Iraq, reducing debt by 80% in several phases, the most recent completed in These measures brought the debt stock down from over US$130 billion at the end of the Saddam Hussein regime to around US$5.8 billion as of March Despite the political and security situation, Iraq is in the process of opening oil exploration to foreign companies and trying to clean up its image; it would be difficult to conceive of a politically motivated default at this stage. Iraq also has very little sovereign debt outstanding in the market: the US$2.7 billion Iraq bond due 2028 and the US$1 billion Iraq 2023 issued in August Interest payments on outstanding sovereign bonds amount to about US$224 million per year, a small fraction of historical fiscal revenues. Moreover, there is no major external debt principal maturing until after 2020, thus its debt servicing profile is very strong. Fiscal Adjustment with IMF Support Iraq entered into a 3-year US$5.34 billion IMF Stand-By Arrangement in July 2016 to help implement policies aimed at adjusting to lower oil prices and ensuring debt sustainability. 10 The program is focused on four key areas: budget reduction and debt stabilization; improved social spending on the poorest and refugees; prevention of accumulation of arrears; and restructuring state-owned entities. Thus far, performance has been mixed, with most of the progress acheived on the fiscal front by reducing inefficient capital expenditures. However, the IMF notes that further fiscal consolidation is needed, particularly to raise non-oil revenues

4 Lazard Emerging Markets Debt Weaknesses Infrastructure Constraints Iraq s ability to increase oil output beyond 4 million to 5 million bpd is limited by infrastructure constraints. Iraq needs a substantial increase in natural gas and water to maintain oil reservoir pressure and boost oil production. While natural gas can be sourced from Iran and Saudi Arabia, water remains scarce. The Ministry of Oil and international oil companies have determined that the only feasible solution for water scarcity is to construct a pipeline to transport water from the Arabian Gulf. This project, called the Common Seawater Supply Project, will cost an estimated US$4 billion US$5 billion 12 and has already been delayed, with completion now planned for Iraq also needs a significant increase in power generation. All of these areas will require major investments. Exports are constrained by the fact that Iraq is basically land-locked, with only narrow access to the Gulf for exports. About 80% of output is from oil fields in the south and the west, and close to 90% is exported from the Basra terminal near the ports in the south. 14 The Kirkuk field in the north exports part of its output through the only other outlet, the Iraq-Turkey pipeline, which brings oil to the Turkish port of Ceyhan. The other two pipelines, to the west via Syria and Lebanon and to the south via Saudi Arabia, are either unusable or closed. On the positive side, Iraq has prioritized the construction of a US$15 billion pipeline connecting Iraq and Jordan. This project will be financed by the private sector with construction expected to start in 2016 but has since been delayed 15,16,17. Iraq has also signed a memorandum of understanding to export oil and gas to Egypt as it seeks to lessen its dependence on Saudi Arabia. 18 Complex and Unstable Political Situation Since the toppling of Saddam Hussein, Shia political parties have monopolized many key government positions. Shias comprise approximately 60% of the population. Sunnis are frustrated with inadequate sharing of resources, including limited financial transfers to governorates, particularly for public services. Such frustration has facilitated the surge of radical Islamic Sunni movements such as ISIS, which the Iraqi military has not been able to contain, forcing the government to seek international assistance. Another key domestic issue stems from the country s Kurdish minority, which continues pressing for secession based on their different ethnicity and language. The region is now semi-autonomous, operating under the Kurdistan Regional Government (KRG). The ongoing issue is around KRG s signing of contracts with foreign oil companies under different and more advantageous productionsharing agreements than those contemplated by Baghdad. Following a Kurdish independence referendum in September 2017, Iraq has entered the disputed city of Kirkuk, further increasing tension between Iraq and the Kurds. 19 Though most oil is produced in the southern part of Iraq, untapped reserves in the northern Kurdish region could amount to an additional 30% of the total. 20 In other regions, the Syrian conflict has also escalated Shia/Sunni and Shia/Kurd tensions, as Syria is mostly Sunni. The conflict in Syria led to a loss of control of the border, with extremist groups such as ISIS taking over Mosul, Iraq s second largest city, although Iraq successfully recaptured Mosul in July The security situation has forced the government to increase military spending, which is estimated to account for 20% of the 2016 budget and includes hiring an additional 10,000 paramilitary personnel

5 Iraq Exposure to Oil Iraq s sensitivity to oil prices is among the highest in emerging markets. Oil represents 33% of GDP, 99% of exports, 87% of 2018 fiscal revenues and is the main source of FX revenues. 23 The sharp drop in oil prices from led to large fiscal deficit that to which the government is still trying to adjust. This dependency is exacerbated by factors such as Iraq s compliance with OPEC to limit production, a challenging security situation that limits export capacity and a lack of financing to invest in increasing production. 24 Fast Depletion of National Savings Account The former UN Security Council-mandated Development Fund for Iraq (DFI), which held the bulk of oil export receipts, expired in June 2011; a successor fund was voluntarily established by Iraq. This means that oil revenues are audited once a year by an independent accounting firm. The fund is managed by the Central Bank of Iraq at the New York Federal Reserve on behalf of the Ministry of Finance. Five percent of the funds go to a compensation fund for Kuwait to settle obligations from the 1991 war, and the remainder is redistributed for budgetary outlays to the central and provincial governments. However, this fund has been quickly depleted, declining from US$18 billion at the beginning of 2013 to US$5.26 billion in March 2014, when it last reported balance sheet figures. 25 More recent estimates place the figures closer to US$1 billion. 26 In addition, audit reports for 2012 and prior report inconsistencies in the DFI s statements and the statements of proceeds of oil export sales. 27 Large Inefficient State-Owned Enterprises State-owned enterprises (SOEs) are prevalent and dominant in the Iraqi economy, and there are an estimated 192 SOEs 28 that are considered generally inefficient, unproductive, and ultimately pose a fiscal drag and contingent liability to the government while simultaneously hindering faster development of the private sector. The International Labor Organization estimates that of the 300,000 entrants to the labor force, 150,000 were hired by the public sector, which generally has a shorter workday, better paid vacation policy, and generous retirement benefits that must ultimately be borne by the government

6 Lazard Emerging Markets Debt Country Background Size Capital Population 438,317 KM 2 (60th) Baghdad 39.2 Million Religion Muslim 99.0%, Other 1.0% Median Age 20.0 Years Literacy Rate 79.7% Independence 3 October 1932 Political System Government Leadership Next Election 2018 Legislative Branch Federal Parliamentary Republic President Fuad Masum; Prime Minister Haider al-abadi Unicameral Council of Representatives Economy Agriculture 5.1%, Industry 37.3%, Services 57.7% Labor Force Agriculture 21.6%, Industry 18.7%, Services 59.8% Merchandise Exports Crude Oil, Food, Live Animals Export Partners China 21.9%, India 20.6%, United States 12.3%, South Korea 10.3%, Italy 6.8%, Greece 5.4% Currency As of November 2017 Source: CIA Iraqi Dinar (IQD) 492

7 Iraq Country Timeline 1932 Iraq becomes independent. Britain retains military bases A Baathist led-coup puts Ahmad Hasan al-bakr in power Saddam Hussein succeeds Al-Bakr as president Iran-Iraq war Iraq attacks Kurdish town of Halabjah with poison gas, killing thousands Iraq invades Kuwait, prompting what becomes known as the first Gulf War. A massive US-led military campaign forces Iraq to withdraw in February UNSC Resolution 986 allows the partial resumption of Iraq's oil exports to buy food and medicine (the "oil-for-food programe") After UN staff are evacuated from Baghdad, the US and UK launch a bombing campaign, "Operation Desert Fox," to destroy Iraq's nuclear, chemical and biological weapons programmes US President George W Bush tells skeptical world leaders at a UN General to confront the "grave and gathering danger" of Iraq or stand aside as the US acts. In the same month British Prime Minister Tony Blair publishes a dodgy dossier on Iraq's military capability US-led invasion topples Saddam Hussein's government, marks start of years of violent conflict with different groups competing for power Saddam Hussein captured in Tikrit US hands sovereignty to interim government headed by Prime Minister Iyad Allawi An average of more than 100 civilians per day are killed in violence in Iraq, the UN says. Al-Qaeda leader in Iraq, Abu Musab al-zarqawi, is killed in an air strike 2006 Saddam Hussein is executed for crimes against humanity US President Bush announces a new Iraq strategy; thousands more US troops will be dispatched to shore up security in Baghdad. UN says more than 34,000 civilians were killed in violence during 2006; the figure surpasses official Iraqi estimates threefold Parliament approves a security pact with the United States under which all US troops are due to leave the country by the end of The al-qaeda-linked Islamic State of Iraq claims responsibility for suicide bombings in Baghdad that kill at least 127 people, as well as attacks in August and October that killed 240 people. Tension flares with Tehran as Iranian troops briefly occupy an oilfield in Iraqi territory US completes troop pull-out.unity government faces disarray. Arrest warrant issued for vicepresident Tariq al-hashemi, a leading Sunni politician. Sunni bloc boycotts parliament and cabinet Troops storm a Sunni anti-government protest camp in Hawija near Kirkuk, leaving more than 50 dead and prompting outrage and clashes in other towns. Insurgency intensifies, with levels of violence matching those of By July the country is described as being in a fullblown sectarian war zone once again Sunni rebels led by the Islamic State of Iraq and the Levant (ISIS) surge out of Anbar Province to seize Iraq's second city of Mosul and other key towns. Tens of thousands flee amid atrocities. Kurdish forces, US and Iran assist government in repelling attacks, US carries out air raids. ISIS renames itself Islamic State, declares a caliphate. Shia politician Haider al-abad forms a broad-based government including Sunni Arabs and Kurds. US announces new forward strategy against Islamic State, carries out air raids in support of Iraqi Army near Baghdad. International conference in Paris, including ten Sunni Arab states but excluding Iran and Syria, agrees to support strategy Government and Islamic State forces fight for control of Tikrit and Anbar Province 493

8 Lazard Emerging Markets Debt 2017 Parliament recognizes the Shia Popular Mobilization Units (PMU) militia as part of the armed forces with full legal status. Government combines forces with Shia and Kurdish allies to drive Islamic State out of all but a few redoubts. Army offensive drives back Kurdish forces in a move aimed at halting the regional government's moves towards an independent Kurdistan. Kurdish voters overwhelmingly backed independence in a referendum in September. Source: BBC Notes 1 As of December Statistical Review of World Energy, BP, June 2017, excel/energy-economics/statistical-review-2017/bp-statistical-review-of-world-energy-2017-underpinningdata.xlsx 3 Luft, Gal, How Much Oil Does Iraq Have?, Brookings, 12 May 2013, papers/2003/05/12globalenvironment-luft. 4 Iraq Delegation Roadshow accessed 16 November accessed 16 November Republic of Iraq Bond Prospectus, September Republic of Iraq Bond Prospectus, July Economic-Stability Republic of Iraq Bond Prospectus, September Bradley, Matt, Stalled Oil Field Project Adds to Iraq s Woes, The Wall Street Journal, 15 September 2015, accessed on 25 November 2015, 14 Iraq, U.S. Energy Information Administration, accessed on 21October 2014, cab.cfm?fips=iz. 15 Clancy, Stephanie, Pipeline projects in the Middle East, Pipelines International, March 2010, accessed on 25 November 2015, %E2%80%94-envoy accessed 16 November accessed 16 November Iraq, U.S. Energy Information Administration, accessed on 21 October 2014, Georgy, Michael and Stephen Kalin, Iraq to adjust military spending, hire 10,000 new forces: minister, Reuters, 28 October 2015, accessed on November 25, 2015, us-mideast-crisis-iraq-spending-iduskcn0sm Republic of Iraq Bond Prospectus, July Republic of Iraq Bond Prospectus, July Financial Statements of DFI, Committee of Financial Experts, accessed on 16 November 2016, BEN VEN HEUVELEN, BEN LANDO, Iraq financial crisis prompts emergency action, Iraq Oil Report, 5 February 2015, accessed on 25 November 2015, 27 Republic of Iraq Bond Prospectus, September Investment Climate Statement Iraq, U.S. Department of State, Bureau of Economic and Business Affairs, May 2015, accessed on 7 December 2015, 29 Republic of Iraq Bond Prospectus, September

9 Important Information Published on 26 February Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opinions expressed herein are as of 24 February 2017 and are subject to change. Forecasted or estimated results do not represent a promise or guarantee of future results and are subject to change. Specific to the political, religious and military unrest in Iraq, and as described in this paper, there exists a heightened risk of ongoing armed conflict and subsequent economic, political and social repercussions to all parties involved. Specific to the political and military unrest in Ukraine and Russia, and as described in this paper, there exists a heightened risk of ongoing armed conflict and subsequent economic, political and social repercussions to all parties involved. An investment in bonds carries risk. 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