Investors are pricing too little risk premium for Mena credits, according to a research note published by Bank of America Merrill Lynch on 8 July.

“We are cautious [about Iraq spillover to regional and international markets]. We believe the turmoil has caused a significant increase in geopolitical risks, which markets keep ignoring. Iraq’s story seems to have many legs to run and could create a major change in the Middle East over the short to medium term,” says analyst Turker Hamzaoglu.

The region is witnessing increased geopolitical risk, with the economic, socio-demographic and political vulnerabilities that gave way to Arab spring remaining largely intact, he adds.

Vanishing colonial borders, heightened sectarian tensions, intra-sectarian conflict amid the radicalisation of Islamist militants, and the increasing violence in the Arab-Israeli conflict could have wider repercussions if the situation escalates.

Oil disruptions are not causing major problems, as lower oil output from Iraq can be offset by production in Libya, according to the report.

Iraq’s oil output was down 170,000 barrels a day (b/d) in June, while exports from the south slowed by 200,000 b/d compared with May to 2.4mn b/d. The Kurdistan Regional Government has started to export through Ceyhan, though this only amounted to about 1 million barrels in June.

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