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Daniel Richards - MENA Economist
Published Date: 28 April 2021
The pandemic-driven oil price slump of the past 12 months, combined with OPEC+ mandated productions curbs as the bloc has tried to put a floor under prices, has exposed the long-existent underlying vulnerabilities in the Iraqi economy. Iraq is one of the most oil-dependent economies globally, and the forced 22% devaluation of its currency for the first time since 2003 at the end of last year underscores the pressures the drop in oil revenues exerted on its external position. Oil tends to exceed 95% of total exports, and accounted for 99.7% last year, driving a 42.6% overall decline in export receipts. Given our expectation for higher oil prices – we forecast that Brent futures will average USD 67.8/b in 2021 compared to USD 43.2/b in 2020 – the outlook is more positive this year, and we forecast a current account surplus equivalent to 1.8% of GDP, compared with last year’s 3.0% deficit.
Source: Bloomberg, Emirates NBD Research
Nevertheless, from a real GDP perspective ongoing production curbs, while set to ease later in the year, will mean that Iraq’s oil production declines once more in 2021, weighing on the economy as a whole (oil makes up nearly two thirds of GDP). We forecast a -2.7% drop in oil production, which will hold back the recovery from the estimated -12.5% real GDP contraction seen in 2020. We forecast real GDP growth of 1.1% this year, with exports remaining a drag but a modest recovery in private and government consumption. While we would expect a more marked improvement in the second half, for the present the Covid-19 pandemic will continue to prevent a return to normal activity. Rising case numbers necessitated a new round of restrictions on movement in Iraq at the start of the Ramadan holy month, a period which would otherwise have seen a ramp-up in activity. Rising inflation on the back of the 2020 devaluation will also impede household spending – price growth hit 4.3% y/y in March, a series high back to 2016 and compared to an average 0.3% over the previous three years.
Source: Bloomberg, Emirates NBD Research
We anticipate a stronger improvement in investment this year, and Iraq looks set to enjoy support from GCC states. At the start of April the UAE government announced that it was set to invest USD 3bn in the country, and around the same time Iraq and Saudi Arabia declared that they were establishing a joint USD 3bn fund aimed at developing the Iraqi economy. Global foreign direct investment fell by 42% in 2020 according to UNCTAD figures, and Iraq’s net FDI was USD -3.1bn last year, the third year in a row it has been negative. With an ongoing need for reconstruction and to address a mounting infrastructure deficit – not least in power generation and water provision – Iraq needs to start attracting foreign money, and Gulf support will go some way to addressing this. US President Joe Biden recently extended a waiver for Iraq to buy Iranian electricity, but new developments by Siemens and GE could see the need for this eased in the coming years. Meanwhile the hydrocarbons sector in Iraq remains the dominant sector for investment as with everything else, and Total has recently signed a deal worth USD 7bn to treat natural gas from a number of oil fields, alongside a solar energy project.
Source: IMF, UN, Emirates NBD Research
Oil is also key to government finances, usually accounting for more than 90% of revenues, and the situation last year saw government inflows fall some -38%, leading to a -15.1% of GDP fiscal deficit, compared with a slight surplus the previous year. As things improve this year we expect a sharp rise in revenues, projecting a total of IDQ 110tn, compared with the budget projections of IDQ 101.3tn as we hold a more bullish average oil price forecast. That being said, an equally large rise in expenditure will keep the deficit wide at -10.3% of GDP, and the difference in the actual oil price to the budget will probably not be sufficient to cover the whole shortfall. The government has said that it does not plan to tap international debt markets but will look to multilateral institutions for any assistance. With a rise in planned investment expenditure, and public acknowledgement of the need to diversify, this deficit could at least help fuel future growth if spent wisely.
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