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MOST LIKELY REGIMES AND THEIR PROBABILITIES
18‑Month: National Unity Coalition 45% (55%)
Five‑Year: National Unity Coalition 40% (45%)

 

FORECASTS OF RISK TO INTERNATIONAL BUSINESS
   

Turmoil

Financial Transfer Direct Investment Export

Market

18‑Month: Very High B- C C (C+)
Five‑Year: High C+ C C+
( ) Indicates change in rating.  *  Indicates forecast of a new regime

 

KEY ECONOMIC FORECASTS
 

Years

Real GDP Growth %  

Inflation %

Current

Account ($bn)

2006-2010(AVG) 7.4 13.1 1.70
2011(F) 9.6 4.9 -0.95
2012-2016(F) 6.2 5.9 6.60

Can the Center Hold?

The departure of the last remaining American military forces from Iraq in December has brought the unresolved issues dividing the country’s three main ethno-religious groups into sharp relief. Among the most contentious are the claims of the semi-autonomous Kurdistan Regional Government to the city of Kirkuk and the oil-rich surrounding area, the continued absence of national hydrocarbons law, disagreements among proponents of a loose federation of largely autonomous regions and supporters of a strong central government, and competition for political and economic influence that reinforces an already dangerously high level of sectarian hostility…

The removal of numerous Sunni officials accused of having been members of the toppled Baathist regime and a push by the Sunni majority in Salahuddin Province for increased autonomy are among the numerous recent developments that highlight the continued risk of a renewed descent in sectarian warfare…

The chances of that unfortunate scenario coming to pass increased markedly on December 19, when Prime Minister Nuri al-Maliki’s Shiite-led government issued an arrest warrant for Tariq al-Hashemi, the country’s Sunni vice president, on charges of organizing hit squads that targeted government officials…

Hashemi has taken refuge in the autonomous Kurdish region of Iraq, and members of the Sunni-affiliated Iraqiyya bloc of parties have declared a parliamentary boycott and announced their intention of removing Maliki from office. The prime minister has threatened to replace Sunni members of his Cabinet if the boycott persists, and US officials are pressing Iraqiyya leaders to cooperate with Maliki in the interest of national unity and domestic stability…

In a best-case scenario, Iraqiyya lawmakers will return to the Parliament, restoring the pretense of a unity government. However, the Sunnis’ lack of trust in its Shiite partners will continue to be an impediment to resolving the many outstanding policy disagreements, and the costs associated with failing to do so will continue to rise…

Deterrents to Investment Will Persist

Freed from the shackles imposed by international sanctions, and boosted by significant international financial support, the economy has the potential to flourish, but only if the government establishes a secure environment and a solid legal framework for investment. Unfortunately, widespread administrative corruption, deficient infrastructure, and shortages of educated and skilled workers resulting from a war-induced “brain drain” will be long-term impediments to realizing the country’s full economic potential…

The long-stalled hydrocarbons law is widely acknowledged to be essential to the country’s economic health, which hinges on the participation of foreign firms in the exploitation of the country’s natural resources. Were Iraq to enjoy an extended period of relative calm, the country’s hydrocarbons sector could become a magnet for FDI, which in turn would enable the government to invest in improvements to infrastructure and otherwise create a more hospitable climate for expansion of the private sector, resulting in rapid growth of employment opportunities and rising incomes…

The eventual approval of a national hydrocarbons law will brighten the prospects for beneficial foreign investment down the road, prolonged delays in creating a legal basis for an attractive investment climate and the numerous impediments to generating consistent strong real GDP growth in the non-oil sector will hold the overall rate of expansion to 6.2% per year through 2016.

Economic Forecasts for the Three Alternative Regimes

  National Unity Coalition Divided Government Formal Partition
  Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

Growth

(%)

Inflation

(%)

CACC

($bn)

2011 9.6 4.9 -0.95 9.2 4.6 -1.20 8.5 5.2 -1.35
2012-2016 6.2 5.9 6.60 2.1 13.0 3.80 4.0 8.7 -2.00

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