Iraq may sell $2 billion in bonds, betting on global aid to lower costs

Baghdad: Iraq may go ahead with plans to sell $2 billion in bonds in the next three months, hoping that international aid will lower the cost of borrowing that derailed earlier plans to issue the debt, the governor of the Iraqi central bank said in a interview Tuesday in Baghdad.
Iraq would like to see the yield drop to 5 per cent from the 11 per cent investors originally demanded, Governor Ali Al Alak said. The sale could be managed by banks including Standard Chartered, Deutsche Bank and Citi, he said.
Iraq had called off a sale of US dollar-denominated bonds in October 2015 rather than pay the 11 per cent yield. It revived those plans in December 2015, saying gains against IS and the support of the World Bank and the International Monetary Fund should cut its costs.
Iraq last sold debt internationally in 2006, when it issued about $2.7 billion of bonds due in 2028 with a coupon of 5.8 per cent. Those bonds now trade around 70 cents on the dollar, for a yield of 11.66 per cent. Standard & Poor's rates Iraq's long-term credit at B-, six notches below investment-grade.
But Iraq hopes to get $15 billion to $16 billion in loans over the next two years from the International Monetary Fund, the World Bank and members of the Group of Seven leading industrialised nations, Alak said.
About $7 billion should come in between June and December, and Iraq may also get US and World Bank borrowing guarantees to cover the planned bond sales, he said.
The IMF said at the end of March said it might approve as early as June a standby arrangement unlocking $15 billion in international assistance over the next three years.
"Any progress" with the IMF "will give positive marks for the market that will help to deal with the bonds' issue," Alak said.
"Besides, several guarantees from the US or the World Bank will help to reduce the interest rate," he said. "Five per cent to 6 per cent will be reasonable. If we can get this kind of guarantee, we might even get less than that."
Iraq is seeking international support after a collapse in oil prices two years ago caused its revenue to drop - the government relies on oil for 95 per cent of its income.
Oil's crash came just as Iraq needed more resources to fight IS, the ultra-hardline group that took control of vast tracts of its northern and western regions. The war displaced about 4 million people.
With oil prices falling and the war intensifying, Iraq's economy shrank by 2.1 per cent last year, the IMF said. Debt is expected to reach 77 per cent of gross domestic product this year.
Iraq plans to implement measures to reduce spending and increase revenue by raising electricity prices and income taxes to facilitate an IMF loan of $6 billion by next June, the central bank governor said.
"There are a few items we have to work on right away," he said. "We have to get an approval from the council of the ministers as soon as possible, before June at least."
The country also hopes to get $4 billion from the World Bank and $3 billion to $5 billion at meeting of the G7 due next month in Japan, he said.
"There is good hope that we will get some support from that meeting - it is on their agenda," he said.