Iraq’s Wrenching Oil Machinery Wrangles

Iraqi debt prices teetered after the post-government creation glow as Shiite/Sunni sectarian violence again flared, with neighboring Bahrain confrontations aggravating the split, as US troops prepare to end combat operations. Oil prices spiked on regional tensions, but 2010 production fell short of potential with attacks and infrastructure bottlenecks, and medium-term plans for a pipeline through Syria are also in doubt from the anti-regime protests there. The extended Al-Maliki administration has yet to name key ministers as coalition partners continue to squabble, and the IMF delivered a lukewarm endorsement of its record under the 2-year $3.5 billion program agreed last year. Single-digit inflation and exchange rate stability have prevailed, with international reserves reaching $50 billion, but petroleum exports were 250,000 barrels/day under the target, and the budget deficit mark was also missed. New geological surveys put proven reserves at near 150 billion barrels, second globally behind Saudi Arabia’s. Upgrades to the Basra terminal are key to realizing capacity, according to foreign companies that have gotten recent contracts, and fiscal outlays are designed for such improvements as well as social and security purposes. Central bank independence has been established by court decision, and the benchmark rate is positive in real terms. State-owned banks Rafidain and Rasheed and the pension fund are active Treasury bill buyers, although private financial sector progress has been slow. The Fund’s latest assessment posits a budget surplus on higher oil prices and bank restructuring initiatives that could solicit overseas interest in 2011. An important element in generating confidence is resolution of outstanding Saddam-era external debt claims with non-Paris Club and commercial creditors, with negotiations conducted “in good faith” in its view.

Saudi Arabia’s dozen banks with a range of Islamic, joint venture and local entrants in contrast have sustained modest private credit expansion through the first quarter, with the industry loan/deposit ratio at 80 percent. A long-awaited mortgage law has been approved to facilitate a housing push announced by the King, who has committed to building tens of thousands of additional units and to relieving 10 percent inflation in the sector on chronic shortages. UAE counterparts also see better prospects with the 100 percent lender and bondholder acceptance of Dubai World’s massive rescheduling after eighteen months of talks. Syria’s nascent non-government intermediaries, mainly units of Lebanese parents, in contrast have suffered from the crackdown there with the currency and infant stock exchange both off sharply. US trade sanctions remain in place, and projects including a billion dollar metro line have been indefinitely sidetracked.

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