Increased output from the Organization of the Petroleum Exporting Countries (OPEC) over the summer has lowered the price of oil yet again, and if this dynamic continues, things don’t bode too well for Iraq, which is gearing up to issue a $5 billion sovereign bond—its first in nine years.
The cash-strapped country is desperately in need of funds. Lower oil prices, combined with higher military spending and increased costs stemming from the ongoing civil conflict have all greatly eroded Iraq’s savings buffers, says Fitch Ratings, which has just assigned the country its first single B-minus credit rating.
Iraq is highly dependent on oil revenues, Fitch said, and has some of the world’s largest reserves, which for the moment, are away from the areas of domestic insecurity. Nevertheless, security is a huge concern for Iraq, with ISIS militants currently controlling three of its 18 provinces, Fitch said.
The upcoming Eurobond will provide some help in financing the country’s deficit. But even with a credit rating from Fitch to back it, frontier market investors like Alison Graham, founder and chief investment officer at Voltan Capital Management, are not sure about Iraq or the bond. Low oil prices are one thing (Iraq is highly dependent on oil revenues), but “our main concern about the Iraqi bond relates to the government’s fiscal management, even more so than to oil prices,” Graham said.
“The bond proceeds will be used mainly to finance the country’s large budget deficit, which we don’t see improving substantially absent better political governance and an amelioration in the security situation. If the bond’s tenor is too short, if oil prices don’t recover substantially or southern export bottlenecks are slow to resolve, Iraq might find itself facing the need to restructure or to rely on International Monetary Fund (IMF) support for repayment.”
Graham also has concerns about repayment.