Iraq May Get Bond Guarantees for $2 Billion Sale to Trim Cost

  • Central bank chief says bond sale expected by second quarter
  • Iraq trying to bridge budget deficit amid falling oil prices

Iraq, reeling under the slump in oil prices and the war with Islamist militants, may receive bond guarantees from international institutions to reduce borrowing costs as OPEC’s second-biggest producer plans a $2 billion sale next year, the central bank chief said.

The government plans to raise the money in the first or second quarter of 2016, Ali Mohsen Ismail said in an interview in Kuwait on Wednesday. Authorities are working on arrangements with the International Monetary Fund and other organizations to make it easier to cut borrowing costs, he said. The government canceled a bond sale this year after potential investors demanded higher interest rates.

“We could get international guarantees, we have promises,” Ismail said.

Iraq’s oil revenue dropped as crude prices plummeted last year. Compounding the crisis is the war with Islamic State militants, who have taken control of major Iraqi cities in the west and north. The IMF estimates the government’s budget deficit will widen to 23 percent of economic output this year from about 5 percent in 2014.

IMF Agreement

The Washington-based lender said in a statement Tuesday it had reached a staff-monitored agreement with Iraq that will “allow the Iraqi authorities to build a track record for a possible Fund financing arrangement.”

Iraq’s reserves will also start to rise in 2017 and will reach $91 billion in 2020, Ismail said, citing IMF estimates. He said in a statement on Tuesday that reserves would total about $60 billion by the end of 2015. Gross foreign assets with the central bank stood at $58 billion at the end of September, according to official data.

“Any engagement with the IMF will help raise investor confidence in Iraq’s fiscal sustainability,” said Raza Agha, chief economist for the Middle East and Africa at VTB Capital in London. “However, the size of their external financing needs suggests that they cannot rely exclusively on private creditors and capital markets,” he said, adding that he estimates that Iraq needs $20 billion annually in external financing.

The yield on Iraq’s $2.7 billion Eurobonds due 2028 surged to the highest since 2009 last month. It was little changed on Wednesday at 9.533 percent, according to data compiled by Bloomberg.

Difficult Year

Ismail said Wednesday that 2016 will be “a difficult year” for Iraq’s finances, and predicted a gradual recovery in 2017. The IMF expects the budget deficit to fall to 17.7 percent of GDP in 2016, from 23.1 percent this year.

Iraq is also in talks for a $2 billion loan from the World Bank, though the government will not list the facility as part of the package to finance the deficit until an agreement is certain, Ismail said.

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