S&P Global Ratings said today it has affirmed Iraq's long-term foreign- and local-currency sovereign credit rating at B- and its short-term rating at B. The ratings agency also removed the long-term ratings from CreditWatch negative, where they had been placed on March 17, 2026. Despite the affirmation, S&P maintained a negative outlook on the long-term ratings.
The rating action reflects the heavy toll the ongoing Middle East war has taken on Iraq's hydrocarbon-dependent economy. S&P said oil output fell sharply from March through May as a direct consequence of the conflict, and it now expects full-year 2026 oil production to be roughly 28% lower than in 2025.
Production data cited by S&P show a dramatic decline in early 2026. Iraq's crude oil output dropped to 1.68 million barrels per day in March from 4.19 million barrels per day in February, a contraction of about 60%. Output fell further to 1.39 million barrels per day in April. Against that backdrop, S&P projects Iraq's real gross domestic product will contract by more than 15% in 2026 before recovering by approximately 13% in 2027.
On the balance-sheet side, S&P highlighted that the Central Bank of Iraq's international reserves remain sizeable. The reserves total just under $100 billion, equivalent to about 36% of GDP, and cover Iraq's total gross external debt outstanding by a factor of 1.7. As of May 2026, the reserves had declined to $91.9 billion; about 25% to 30% of those reserves are held in gold and roughly 45% in U.S. Treasuries.
S&P noted that higher average oil prices through 2026 should help support fiscal and balance-of-payments receipts, provided that oil exports gradually recover in the second half of the year. Nevertheless, the ratings agency has revised its fiscal forecast to reflect the deeper production shortfall. It now expects the general government budget deficit to widen to 7.5% of GDP in 2026, up from its projection of 4.5% published in March 2026, given the more prolonged drop in production.
Looking further ahead, S&P anticipates the government's debt position will worsen once liquid assets are taken into account. The agency projects general government debt net of liquid assets will rise to 54% of GDP by 2029, from 35% in 2025. The stock of government debt is about 55% domestic and 45% external, with the external portion largely concessional and owed to multilateral and bilateral creditors.
The negative outlook attached to the long-term ratings reflects multiple risks that S&P expects could weigh on Iraq over the next six to 12 months. The agency identified the potential for more persistent disruptions to key export trade routes through the Strait of Hormuz and the risk of physical damage to infrastructure as particular areas of concern. S&P warned it could lower Iraq's ratings if the conflict escalates significantly, if disruptions to critical export routes prove more sustained than currently assumed, or if Iraq's willingness to service its debt obligations were to diminish.
Note: This report presents S&P Global Ratings' assessment and forecasts as described above. Where S&P has set ranges or qualifiers, they are reported here as provided.