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Investing.com -- Moody’s Ratings has affirmed Iraq’s Caa1 long-term domestic and foreign-currency issuer ratings with a stable outlook, citing persistent challenges from weak institutions and governance.
The rating agency highlighted Iraq’s heavy reliance on the hydrocarbon sector, which accounts for approximately 90% of government revenue, exposing the country to oil price fluctuations and significant carbon transition risks. This dependence makes Iraq particularly vulnerable to projected lower oil prices in 2026-27 compared to 2023-25.
Political fragmentation following the November 2025 elections is expected to delay the formation of a new government and adoption of a timely budget framework, similar to what occurred after the 2021 elections. The current triennial budget expires at the end of 2025.
Moody’s projects Iraq’s fiscal deficit to reach around 7.4% of GDP in 2025, widening to nearly 9% over 2026-27. Government debt is expected to rise above 60% of GDP by 2026. After a GDP contraction in 2024, Moody’s anticipates a modest recovery in 2025, with growth accelerating to approximately 4% in 2026, supported by rebounding oil production.
Despite these challenges, the stable outlook reflects several mitigating factors, including the favorable composition of government debt, robust foreign exchange reserves, and a contained external debt profile. Most of Iraq’s external debt consists of legacy arrears to non-Paris Club members that are currently not being serviced.
The Central Bank of Iraq’s strong foreign exchange reserve position continues to provide resilience against external shocks, reducing near-term liquidity risks despite increasing government financing needs.
Moody’s noted that Iraq’s Environmental, Social, and Governance (ESG) Credit Impact Score is CIS-5, indicating that ESG risk exposures have considerably lowered the country’s rating. This reflects very high exposure to environmental and social risks, combined with very weak institutions and governance.
The rating agency identified factors that could lead to an upgrade, including enhanced resilience of public finances to oil price shocks and improved public finance management resulting in more contained fiscal deficits. Conversely, increased risk of government default, significant erosion of foreign currency reserves, further deterioration in the fiscal deficit, or domestic banking system stress could lead to a downgrade.
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