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Posted: 7 May 2020

Iraq Budget Battle Looms as Saddam-Era Bond Plan Falters

(Bloomberg) — As Iraq inches toward the formation of a new government, the risks are stacking up for OPEC’s second-biggest crude producer.

Beyond the country’s long-standing sectarian tensions, frayed relations with the Kurdish north, a bloated public wage bill and endemic corruption, new Prime Minister Mustafa Al-Kadhimi now has to grapple with a collapse in oil revenue and the fallout from the Covid-19 pandemic.

Little wonder that the country is seeking financial aid from the U.S. and is said to have asked the International Monetary Fund for a deferral of payments on some $546 million in loans. Its Eurobond yields average 15.7%, easily the highest among Middle Eastern governments, according to Bloomberg Barclays indexes.

All this just as Iraq prepares to meet a $294 million debt payment in July, including a capital installment on 2028 dollar bonds. Those date from a 2006 plan to restructure Saddam Hussein-era securities in the wake of the U.S. invasion in 2003.

Gross domestic product is forecast by the World Bank to contract 9.7% in 2020, after growing 4.4% in 2019. The IMF sees the budget shortfall ballooning to 22% of GDP, wider than anywhere except East Timor, Brunei and Tuvalu.

Even if it avoids defaulting, there’ll be problems further down the road because the deficit’s going to skyrocket,” said Anna Wilton, an assistant director at Falanx Assynt, a London-based consultancy that provides geopolitical and business risk analysis. “Given the circumstances, it will be able to secure some help from the IMF. If not dollars, then at least an agreement on deferral.”

Investors have been voting with their feet. The yield on the $2.7 billion of government notes due in 2028 has more than doubled to 14.3% since early March. Iraq’s bonds have lost holders 22% this year, the worst performance after El Salvador…

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