Banking & Finance

Moody’s opts to keep Iraq on lowly sovereign rating

July 25, 2023

Workers at an oil refinery in Kerbala, central Iraq. Rising oil prices have helped the country to pay down debt

Agency maintains Caa1 rating, citing corruption and weak institutions
Decision comes despite oil prices boosting foreign exchange reserves
Two-thirds of government’s spending is public sector pay and pensions

An influential ratings agency has decided to keep Iraq on one of its lowest sovereign ratings, despite the country’s strong oil exports and recovering foreign exchange reserves.

Moody’s Investor Services said in an annual review released last week that corruption and weak institutions prompted it to maintain Iraq on a Caa1 rating, which is on a par with Nigeria and Bolivia.

The agency assigned the sub-investment grade rating despite higher oil prices allowing Iraq’s central bank to bolster foreign exchange reserves and pay down debt owed to Kuwait and providers of electricity including Iranian entities.

Ratings from Moody’s and its competitors are watched closely by international investors to determine capital allocations.

Moody’s said the $89 billion in Iraqi central bank foreign-exchange reserves at the end of 2022 was higher than the overall stock of external government debt of $68.5 billion as of the end of 2021.

But any Iraqi government has little room to move fiscally. Two-thirds of current spending is made up of public sector wages and pensions, according to the agency.

Moody’s said much of its analysis was underpinned by the country’s precarious politics and described corruption as an enduring problem.

An internal audit in November 2022 found that $2.5 billion had been embezzled from Iraq’s General Commission for Taxes during 2021-22, the agency pointed out.

Two decades on from the US-led invasion and nearly six years after the defeat of the Islamic State insurgency, more than a fifth of Iraq’s population still lives in poverty.

Separately, Ericsson, the Swedish telecoms giant with operations in Baghdad, has been forced to distance itself from Quran-burning in its home country after Mohammed Shia Al Sudani, Iraq’s prime minister, ordered the withdrawal of his chargé d’affaires from Stockholm.

On Thursday night hundreds of demonstrators stormed the Swedish embassy in Baghdad in response to an incident in Stockholm.

Anti-Islam protesters and Kurdish activists, some of whom are opposed to the governments in Iraq and Turkey, have organised a number of Quran burnings in Sweden in recent months.

However, it is not known whether the Muslim holy book was actually burnt on Thursday.

Ericsson has around 30 employees in Baghdad involved in selling mobile network infrastructure and providing technical support and maintenance to local operators.

The company said in a statement on Friday that Quran burning “does not reflect Ericsson’s core value of respect”.

Al Sudani, who became prime minister last October, also told the Swedish ambassador in Baghdad to leave Iraqi territory.

Earlier this month, Al Sudani signed a much-delayed but critical $27 billion deal with TotalEnergies of France. It includes a long-awaited seawater purification project needed to raise pressure in Iraq’s prolific but ageing super-giant oilfields, as well as a 1GW solar power plant and a gas processing facility.

Saudi Arabia’s Acwa Power has also pledged to help build a large solar facility near Najaf in the south of Iraq while Aramco, the Saudi state-owned oil major, has said that it is looking at developing a neglected gasfield in Iraq’s Anbar province.