Iraq: Security risks to stabilise in 2018

28 February 2018

Security risks in Iraq have stabilised in recent months as Islamic State (IS) has suffered territorial losses. However, IS remnants remain a threat and energy assets may be targeted. The economic outlook will improve in 2018, as foreign investment returns to Iraq. However, investors will continue to face a challenging business environment as government non-payment risks are elevated.

Security Environment

IS has suffered significant territorial losses in Iraq in recent months but retains the ability to inflict heavy losses on government forces. In February 2018, 25 government-backed militia fighters were killed by IS near Kirkuk. IS fighters are likely to prioritise vehicle-borneimprovised explosive device (VBIED) attacks in Baghdad, Kirkuk, Anbar and Salahuddin provinces. The group’s ability to target assets in the south is more limited, although any incidents are likely to target the oil sector, given its importance to state revenues.

In September 2017, Iraqi Kurds voted in favour of independence in a referendum. The following month, Iraqi government troops retook disputed territory held by Kurdish forces, including the Kirkuk
and Bai Hassan oilfields. The military operation has caused disruption to the volume of oil flowing through the Kurdish pipeline from Kirkuk to Ceyhan in Turkey. The possibility of an escalation of the conflict poses a risk to oil and gas operations in Iraqi Kurdistan.

Employees of the oil sector face a significant threat of kidnap and ransom. In January 2016, three US government contractors were kidnapped in Baghdad but were released the following month. It is not clear if a ransom was paid. Organised crime has also become prevalent in Iraq, and the country loses around USD 8 billion a year due to oil theft. Violent protests in the lead up to Iraq’s May 2018 elections may disrupt commercial operations. In February 2017, six people were killed during clashes between rival Shi’ite groups in Baghdad demanding changes to the electoral system.

Trading Environment

An improved security environment will support improved GDP growth of 2.7% in 2018, up from an estimated 0.1% contraction in 2017. Modest improvements in global oil prices will generate export gains, supporting a current account surplus of 3.6% in 2018. Foreign exchange reserves are forecasted to increase to USD 49 billion by the end of 2018, equivalent to 10.8 months of import cover. This will restore confidence in the Iraqi dinar’s peg to the US dollar and enhance price stability.

This should mitigate the currency inconvertibility and transfer risks facing international firms in Iraq. However, this trend is contingent on the government’s ability to maintain security in southern Iraq and protect oil exports, which account for 98% of export earnings. A rapid and sustained deterioration in the security environment around Basra could lead to renewed strain on foreign exchange reserves. Iraq’s fiscal deficit is elevated, at a forecasted 6.9% of GDP in 2018. However, international assistance will mitigate sovereign credit risks.

An International Monetary Fund (IMF) Stand-By Arrangement, agreed in July 2016, will provide USD 5.43 billion of funding in the period to June 2019.

Investment Environment

Despite disruption in the north of the country, oil production remains resilient and Iraq produced 4.41 million barrels per day in December 2017. In early 2018, plans were announced for the construction of a number of refineries at Faw, Nasiriya, Qayara, Kirkuk and in Anbar province, as well as a proposed pipeline to export oil from northern Iraq to Iran. However, the regulatory environment is poor in Iraq and corruption is pervasive at all levels of government and business.

As a result of the government’s reliance on foreign investment, expropriation risks are low in the oil sector. However, non-payment and contract alteration risks are elevated. The Iraqi government’s financial position may expose companies operating in the country to payment delays in the event of a sudden reduction in foreign aid levels.

In March 2016, the Iraqi government revealed that it was in arrears of USD 2 billion in payments due to oil companies under service contracts. Iraqi Kurdistan’s ability to pay oil producers and creditors will be undermined now that Baghdad has reasserted control over much of the region’s hydrocarbons revenues. The Iraqi government has also replaced the Kurdish-appointed contractor at the Kirkuk oilfield, Kar group, with the North Oil Company.

Iraq: Security risks to stabilise in 2018

*** A number of underwriters are willing to consider Iraqi enquiries, and pricing will significantly depend on the location and sector. In general, underwriters are most interested in the oil and gas sector.

††† Due to the nature of the risk in Iraq, purchasing Terrorism & Sabotage cover only has no impact on pricing. 

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

JLT's World Risk Review Ratings

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 Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com

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