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Investing.com -- S&P Global Ratings has reaffirmed Iraq's long-term and short-term foreign and local currency credit ratings at 'B-' and 'B' respectively, maintaining a stable outlook. This decision was announced on February 7, 2025.

The stable outlook is based on the expectation that Iraq's foreign exchange reserves will continue to exceed its debt-servicing obligations for the next 12 months. This is despite significant risks from political uncertainty, weak institutional framework, and a lack of economic diversification.

The ratings agency noted that Iraq's political and security situation remains unpredictable. A downgrade could be considered if there were perceived weaknesses in the country's institutional framework that reduced the government's ability or willingness to service debt. Additionally, increased pressure on Iraq's fiscal or external positions, such as a sharp and prolonged decline in oil prices or production, could also lead to a lower rating.

On the other hand, the ratings could be upgraded if higher-than-expected GDP growth, possibly from renewed reconstruction efforts, boosted the country's real growth and GDP per capita, and supported fiscal and external metrics. Institutional reforms and a more stable security environment could also improve the ratings agency's opinion of the government's debt-servicing capacity.

The ratings affirmation comes despite Iraq's ongoing fiscal expansion plan for 2023-2025, which is expected to lead to a rise in general government debt. The budget deficit is forecast to widen to 6.5% of GDP in 2025 and average 7.2% over 2026-2028. Despite these challenges, external metrics are projected to remain strong, with the country maintaining a net external asset position throughout 2025-2028 and usable foreign exchange reserves standing at over 12 months of current account payments.

Political tensions have been heightened due to regional conflicts in Gaza, Lebanon, and Syria. Domestic tensions may also increase ahead of the October 2025 parliamentary elections. Despite these factors, S&P Global Ratings maintains that Iraq's sizable oil export volumes will support external surpluses and foreign exchange reserves, which are expected to remain in excess of $100 billion over 2025-2028.

Despite being the world's fourth-largest proven crude oil reserves and the third-largest oil exporter in OPEC+ after Saudi Arabia and Russia, Iraq's economy remains hampered by high levels of perceived corruption and domestic political infighting. The country's fiscal position remains volatile due to oil revenue dependence and high spending pressure. However, the ratings are supported by Iraq's still-moderate public and external debt levels, large inflows of hard currency revenue from oil exports, and a large stock of FX reserves.

The country's oil production is expected to remain largely flat at 4.14 million barrels per day (bpd) in 2025, in line with its OPEC+ quota. However, production is expected to recover to 4.40 million bpd by 2027, following the signing of large oil investment projects with international oil companies such as TotalEnergies (EPA: TTEF ) SE (A+/Stable/A-1) and BP PLC (NYSE: BP ) (A-/Stable/A-2).

Despite its large hydrocarbon endowment and population, Iraq has a relatively low GDP per capita, estimated at $5,600 in 2025. Real growth is forecast to remain subdued at 1.3% in 2025. The country continues to depend heavily on Iran for its electricity and gas needs, despite U.S. sanctions imposed on Iran that result in recurrent payment delays and consequent interruptions to gas imports from Iran.

In conclusion, Iraq's political and economic development is hampered by widespread corruption and the threat of domestic and external tensions. However, its sizable oil exports and large foreign exchange reserves are expected to keep the country's credit ratings stable.

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