S&P Global Ratings has affirmed its ‘B-’ long-term and ‘B’ short-term foreign and local currency sovereign credit ratings of Iraq with a stable outlook, as the war-torn country continues to implement reforms.

“We expect the government will continue to implement the fiscal consolidation programme supported by the International Monetary Fund (IMF), which should help narrow fiscal deficits, and preserve the level of foreign reserves,” according to a S&P statement.

The US-based rating agency, however, estimates that after strong growth in 2016, the overall GDP growth between 2017 and 2020 will remain subdued because of lower investment in the oil sector, fiscal austerity, and domestic political tensions.

“The stable outlook reflects our expectation that fiscal consolidation will continue over the next few years, while economic growth prospects will be subdued owing to domestic political tensions and constrained government spending,” S&P said in the statement.

S&P expects Iraq to report strong real GDP growth of about 5 per cent in 2016, driven by the increase in oil production and exports, however, real GDP growth will fall below 1 per cent on average in 2017-20 owing to the headwinds from fiscal consolidation and weak non-oil growth.

Iraq’s oil production in 2016 was estimated at 4.5 million barrels a day (b/d), compared with 3.5 million b/d in 2015, and S&P projects that the oil production will remain close to these levels until 2020, as increasing oil output to more than 4.5 million b/d would require significant investment contrary to the authorities’ fiscal consolidation plans.

Iraqi oil exports are projected to reach 3.8 million b/d by 2020, substantially, up from 3.0 million b/d in 2015 and 2.5 million b/d in 2014

Iraq has the world’s fifth-largest proven crude oil reserves and is the second-largest oil exporter in oil cartel Opec. Oil dominates the Iraqi economy, contributing over 50 per cent of the GDP, 90 per cent of government revenues, and more than 95 per cent of its total exports.

S&P said the ratings on Iraq remains constrained by the government’s war against the Islamic militant, the early stage of development of its political institutions, as well as the divisions between the Sunni, Shia, and Kurdish ethnic and sectarian groups.

The ratings are underpinned by the assumption that Iraq’s oil output remains in areas firmly under the control of the federal government. Over 85 per cent of Iraq’s oil fields and oil output are located in the south of the country, close to Basra, the main port for crude exports.

“These fields are at some distance from the conflict in ISIS-held areas and we assume that the Iraqi government will remain in control of these assets,” the rating agency said in the statement.

The government forces are engaged in a US-backed campaign to retake Mosul, Iraq’s second largest city and the last stronghold of the Islamic militants in the country. The army, in coalition with Kurdish Peshmerga forces, has recaptured the eastern side of Mosul and is preparing the ground to retake the western side of the city. The militants had previously controlled large areas in Iraq along the Tigris and Euphrates rivers north of Baghdad, however, their territorial control of northwest Iraq has shrunk significantly.

Iraqi forces and their allies have retaken some territories from the militants, including Ramadi, Fallujah and Baiji, the site of Iraq’s largest oil refinery

“Future governance of the Sunni-dominated territories liberated from ISIS remains a key political and security challenge for the Iraqi government,” S&P noted in the statement.