Iraq Defence and Security Report Q2 2009

The convincing victory for Prime Minister Nouri al-Maliki's State of Law coalition in January's provincial elections is attributable to his government's negotiation of the US-Iraq security pact and to the tangible improvements in security of the past two years or so. As a result of increasing stability due to the consolidation of these security gains, we have lifted both our short-term and long-term political risk ratings.

On January 31 this year, provincial elections that were held in 14 of Iraq's 18 provinces attracted a turnout of just over half (51%) of eligible voters, and resulted in a dramatic reshaping of local power arrangements.

The Pentagon's latest quarterly progress report to the US Congress, published in mid-January, states that inadequate supplies of food, water, electricity and healthcare have replaced the security situation at the top of the Iraqi citizenry's list of concerns. The fact that Iraqis are more concerned with the quality of their lives than mere survival represents definite progress in Iraq's slow transition to becoming a more 'normal' state.

In February 2009, US President Obama announced plans to withdraw the bulk of US troops by August 2010, with about 50,000 troops to remain until 2011. This is largely due to the continually improving security situation in Iraq. The deadline for withdrawal of US troops is the end of 2011, as stipulated by the US-Iraq security pact that was concluded in late 2008.

Though Iraq is likely to remain a transition state encumbered with relatively high levels of violence at least into the medium-term, if not longer, it is nevertheless making progress towards becoming a 'normal' country. As such, we have revised upwards its political risk ratings. Our short-term rating has moved up to 39.8 (from 34.8), and our long-term rating is now at 47.9 (up from 46.4). It should be noted that despite this upgrade, both these ratings are still the lowest for all the countries in the Middle East and North Africa region.

We expect Iraq's economy to expand robustly over the coming years, on the back of increasing oil production and strong growth in the non-oil sector. We have pencilled in real GDP growth of 6.1% in 2009, 6.0% in 2010, and over 2009-2013 we expect growth to average 6.3%. This relatively optimistic outlook runs in marked contrast to our bearish view of the global economy – we see global growth falling to -0.8% this year, before rebounding to (a low by historical standards) 2.0% in 2010. A number of factors support our view, such as: ???Foundations Laid In Security Gains ???Inflation To Remain At Manageable Levels ???Little Contagion From Global Financial Crisis ???Ongoing Oil Sector Expansion ???Infrastructure Upgrades Should Prove Key The foundations for our sanguine view are primarily the much improved security situation, the prospects for significant investment into the oil industry over the coming years, and the continued post-war reconstruction of the country. The principal risks to our forecasts relate to global oil prices. Our expectations for the global oil market to pick up in 2010 and onwards are predicated on our forecast for a recovery in the global economy: after a contraction of 0.8% in 2009, we see global growth rising to 2.0% and 3.5% in 2010 and 2011 respectively. A quicker economic recovery would likely see oil prices rebounding faster than we currently expect, with Iraq's balance of payments outlook consequently improving.