During the past two months, Iraq has witnessed a resurgence of deadly violence and attacks in different parts in the country. In April, countrywide deadly attacks were carried out in the run-up to the provincial elections, which had to be delayed in two provinces due to security concerns. Later that month, deadly violence broke out again in northern Sunni regions, after security forces opened fire on anti-government protesters, killing at least 27. Last month, several Shia areas were hit by militant attacks, including a persisting Al-Qaeda branch. According to the UN, almost 600 civilians were killed in April, the highest monthly death toll since mid-2008, although still lower than the much more deadly period in 2005-2007 (at its peak in July 2006, more than 3000 casualties were reported). The Iraqi government has been plagued by political infighting, which has further deteriorated since the US withdrew its troops end 2011. Tensions within the government have also become increasingly sectarian, given the important Sunni-Shia Muslim division that runs through the Iraqi society and is further being aggravated by the war in Syria, a country which is also hit by sectarian divisions.

Impact on country risk

The events of the past months underscore Iraq’s continuing vulnerability to sectarian and political tensions. Taking into account the deteriorating situation in neighbouring Syria, there is no prospect of a fundamental improvement of the security situation in the short term, which in fact even risks further deteriorating. Due to the relating uncertainties, the cover of medium-/long-term export credits on Iraq remains thus a distant prospect, despite an improving financial-economic situation during the past years. This recovery is based on significant debt relief and a strong performance of the oil sector. Iraq, whose oil reserves are estimated to be the 5th largest in the world, has benefitted from increased oil production and higher international oil prices, boosting government revenues and exports. However, the country’ high dependency on the oil sector (good for 96% of foreign exchange receipts and more than ninety percent of government revenues) makes it vulnerable to shocks in international oil prices. The country’s liquidity situation remains healthy, with foreign exchange reserves sufficient to cover almost 10 months of imports.

Analyst: The Risk Management Team, r.cecchi@credendogroup.com