BMI View : The negative view of Iraqi construction and infrastructure that has pervaded our outlook for several quarters has had little reason to change this quarter. While the security situation, particularly in the Islamic State (IS)-held north of the country, worsens, the government's ability to finance infrastructure will remain limited and private investment will be deterred. On a positive note, the World Bank has agreed a USD350mn loan to help rebuild infrastructure in war-damaged regions. In the investment bright spot of Kurdistan , the regional government has passed a law allowing the region to tap international capital markets for USD5bn towards infrastructure development.
Iraq's construction industry is being severely affected by the poor security situation, with the IS insurgency even affecting business sentiment in the Kurdish region, the once-considered relatively safe haven and primary investment destination. After failing to agree on a budget for 2014, the new parliament has approved one for 2015. However, it has been greatly limited by the falling oil price and the diversion of funds to security, meaning in the short term that infrastructure development will not likely receive the full state backing it requires. Meanwhile, the poor business and operational environment will continue to deter private investment from a country with a large reconstruction-related project pipeline. The potential in Iraq is great, as too is the risk, and we do not foresee stability until at least the medium term.
In the previous quarter we had expected growth in 2014 to contract by 6% in 2014, but after the release of official data, we have significantly downgraded our estimate to -16.2% for the full year. Furthermore, as opposed to seeing 2015 as a return to growth, as we had originally expected, we now see a decline of -7.6%. We are forecasting in 2016 a return to growth, with a very base-effected and weaker than originally anticipated 3.8%.
Following a much-debated law in the Kurdish Parliament passed in early June - without approval from Baghdad - the KRG will be able to raise up to USD5bn from international capital markets under the condition that the money be used to fund infrastructure projects. KRG representatives, including the deputy prime minister, are travelling to London to meet with investors, with the sale potentially happening as early as the end of June. We expect the Kurdish borrowing rate to be significantly higher than Iraq's, as several factors increase the risk premium. In particular, the limited economic data available for the region, which does not have a credit rating, and the reliance of the KRG on Baghdad for its budget -the Kurds will only meet 50% of their budget needs if they exported at their pipeline's full capacity - will deter foreign investors.
Iraq can add a USD350mn World Bank loan to its coffers. In July the country and the bank signed a loan agreement to fund emergency reconstruction in towns recaptured from IS. According to Iraqi Finance Minister Hoshiyar Zebari, one-third will go towards repairing roads and bridges, while another one-third will help restore electricity networks, water and sewage.
In a move that posits a degree of faith in the potential of the country's construction sector, Renault Trucks ME expanded into Iraq excluding-Kurdistan to distribute heavy duty trucks via a partnership with local operator Sunflower General Trading Company. Renault has also announced a 1,000sq m service centre and workshop to service the estimated 2,500 Renault Trucks already in Iraq - scheduled to open in Q116. This comes after the company opened a production plant for its C, K and D ranges in Iraq during 2013.