Iraq is planning to issue a $2 billion international bond in 2016 - 20 Nov 2015

Iraq is planning to issue a $2 billion international bond next year in the first or second quarter with World Bank guarantees for up to $1 billion reports Reuters. 


The announcement, from the Central Bank governor, Ali al-Alak, follows a decision from the finance minister, Hoshiyar Zebari, to cancel a bond issue earlier this year as the yield it would have had to pay on the debt was too high. 


Mr al-Alak expects the new bond’s yield will be less than the 11.5 per cent that investors demanded in a roadshow in Europe and the US in September last year. Despite being OPEC’s second largest producer, Standard and Poor’s B- or ‘junk’ rating for Iraq marks it below investment grade – resulting in higher interest rates for the issue. 


“It will be $2 billion but they (the World Bank) will guarantee let’s say 40 or 50 per cent of that,” Mr al-Alak told Reuters. “That will open the market more – make it wider – to attract more investors.”


If the issuance goes ahead this time round, it will be Iraq’s first since 2006. The country is in need of cash to fund infrastructure projects, pay government salaries and fund the war against the Islamic State of Iraq and the Levant (ISIL).


Much of this year’s $100 billion budget has been redirected to the military, impacting the government’s ability to finance basic services including water and electricity. Living standards have become so poor that a wave of protests began in the summer across major cities demanding better services and an end to corruption, while the country now battles a cholera outbreak.


The government has factored in the bond into next year’s budget in order to finance a fiscal deficit of about $21 billion out of approximately $95 billion budget according to Reuters. 


In total, the government had hoped to raise $6 billion in three issues. Citigroup, Deutsche Bank and JP Morgan were lead managing the initial issue and sources say the same banks have been approached to prepare a roadshow for next year’s issuance. 


The news comes after Iraq agreed to an International Monetary Fund (IMF) mission to monitor its finances in a bid to cut down on federal spending and reduce the budget deficit in return for a $1.24 billion loan. 


But an IMF loan, which will be provided in multiples as an emergency fund will be subject to various conditions including the reduction of energy price subsidies and the modernisation of state-owned enterprises, which could be politically difficult to implement. 


The IMF estimates the government’s budget deficit will widen to 23 per cent of economic output this year from about 5 per cent in 2014, while it expects the budget deficit to fall to 17.7 per cent of GDP in 2016.


Iraq Energy Institute