Iraq Defence and Security Report Q3 2009

The security situation in Iraq has improved substantially over the past two years; however, tensions between Arabs and Kurds could escalate into ethnic conflict. Iraq can be divided into three broad regions: the Kurdistan Regional Government (KRG) controlled territory in northern Iraq remains safe; the predominately Shi'a Arab areas of southern Iraq are, by and large, at peace; but a band of territory between these regions, running from Nineveh (and to some extent Anbar) in the west, through Kirkuk, Salah al-Deen, and Baghdad in central Iraq, to Diyala in the east, is still plagued by violence. That said, levels of violence in these latter provinces do not compare with 2005-2007 levels, during the height of the insurgency.

We expect violence to slowly trend down over the coming months as the Iraqi Army and Coalition forces continue to target al-Qaeda in Iraq, the Islamic State of Iraq, and other Sunni rejectionists who have been able to find shelter within the Sunni communities of the aforementioned restive provinces. Nonetheless, these outlawed groups will likely continue to carry out high-profile attacks for some time. Iraqi unrest continued in Q209 with bomb attacks in Baghdad and northern cities during May.

News has been mixed on relations with Iraq's Kurdish people. The Kurdistan regional government and the Iraqi oil ministry reached an agreement on May 10 allowing the Kurdish region to export oil. That was followed in early June by the barring of a political party, said to be close to Kurdish rebels in Turkey, from upcoming elections in Iraq's autonomous Kurdish region.

The Iraqi Security Force (ISF) will be increasingly tested following the withdrawal of US troops from Iraqi towns and cities at the end of June 2009. The evolution of the security situation following this milestone will provide a useful insight into whether the ISF will be able to maintain stability following the final withdrawal of US troops, which will happen by the end of 2011 at the latest.

We expect Iraq's economy to expand robustly over the coming years, and have pencilled in real GDP growth of 4.5% and 6.0% in 2009 and 2010, respectively. Over the course of our five-year forecast period (ending 2013), we see annual growth averaging 5.8%. This represents solid growth, though somewhat down from our 6.1% estimate of the previous quarter. This expansion, we expect, will come largely on the back of increasing oil production and strong growth in the non-oil sector.

The much improved security situation is the main factor in our optimistic appraisal, along with the prospects for significant investment into the oil industry over the coming years, and the continued postwar reconstruction of the country. However, Iraq's economic prospects depend crucially on global oil prices. Our expectations for the global oil market to pick up in 2010 and onwards are predicated on our forecast for a recovery in the global economy: after a contraction of 0.8% in 2009, we see global growth rising to 2.0% and 3.5% in 2010 and 2011, respectively. A quicker economic recovery would likely see oil prices rebounding faster than we currently expect, with Iraq's balance of payments outlook consequently improving.

This quarter, we have introduced a significant new aspect to BMI's Defence Reports, which is the City Terrorism Rating (CTR). This assesses the risk of a terrorist attack. The CTR takes into account the overall BMI Terrorism Rating for the country in question. It also incorporates the 'prevalence' of terrorism, which recognises the frequency of attacks, and whether the city is a target for terrorists. The CTR also recognises the 'threat' of terrorism in terms of the likely numbers of victims and the ability of groups to launch sustained campaigns. Not surprisingly, Baghdad's CTR figure of 0 is the worst in our list. This is followed by Algiers (15) and Tel Aviv (17.5). Although the CTR is 0, the overall BMI Terrorism Rating of 5 for the country indicates some optimism.