Country Report Iraq July 2009

Outlook for 2009-10

• The drawdown of US forces from early 2009, and the continued weakness of central authority, may allow militia and insurgent groups to re-establish themselves in some areas, although violence should not return to 2006-07 levels.
• The potential for a fundamental realignment of Iraqi politics is rising, with the prime minister, Nouri al-Maliki, leaning towards a nationalist alliance involving more secular and tribal forces.
• Despite the mixed success of the first oil licensing round, the role of foreign oil companies in the sector will gradually expand, as they are drawn in by the unique opportunity posed by Iraq's massive oil reserves.
• We have lowered our forecast for Iraq's fiscal deficit, after revising up our oil price projections. Nevertheless, we still expect a deficit of US$12.5bn in 2009, which is forecast to narrow to US$6.5bn in 2010 as oil revenue rises.
• Real GDP growth is forecast to slow in 2009-10, from an estimated 7.8% in 2008 to an average of 5.7%, as a tighter fiscal stance has a knock-on impact across the economy.
• Iraq's current-account outlook has strengthened, in line with the increase to our oil price forecast. We now expect the current account to return a deficit of US$3.2bn (4.3% of GDP) in 2009, which will narrow to US$1.4bn in 2010.

Monthly review

• In accordance with the Status of Forces Agreement, the US military has withdrawn from Iraq's cities. The pull-out has been accompanied by a pick-up in violence, raising concerns at the ability of the Iraqi military to uphold security.
• After meetings with the leader of the Islamic Supreme Council of Iraq and Grand Ayatollah Sistani, Mr Maliki has raised the prospect of strengthening the United Iraqi Alliance, or Shia list, by broadening its composition.
• In Iraq's first bidding round for eight large oil and gas fields, there has been no agreement on seven of the fields on offer. However, the one deal agreed should boost Iraqi oil output by 1.9m barrels/day.
• Despite the lack of progress made with the first licensing round, the government has said that it is looking to expedite its second bidding round, although it is considering adjusting the terms of its auction.
• The start of formal oil exports from new fields in Iraqi Kurdistan has been followed by a number of high-profile takeovers, including one launched by China's Sinopec.
• Oil earnings have increased in recent months, lifted by the rise in oil prices, causing the prime minister to consider introducing a supplementary budget.