Economic Analysis - No Devaluation As Pressures On The Peg Ease - 02 OCT 2017
BMI View: The Central Bank of Iraq will continue to focus on protecting the peg of the dinar to the US dollar over the coming quarters, which will be facilitated by easing pressures on the peg owing to recovering oil prices. Foreign reserves will also remain robust, underpinning the central bank ' s ability to defend the currency.
We believe that pressures on the Iraqi dinar's peg to the US dollar will continue to ease over the coming quarters, although they will not completely wane as oil prices remain low by historical standards. The slump in oil prices, combined with the sharp deterioration of security conditions in the country have dramatically weighed on investor sentiment and capital inflows since 2014. With the situation having stabilised since the start of the year, we maintain our view that the Central Bank of Iraq will continue to successfully defend the peg.
Recovering oil prices and the ongoing defeat of Islamic State (IS) will continue to have a positive impact on the economy. Illustrating these ongoing improvements, the M2 over foreign reserves ratio - which we use as a proxy for depreciatory pressures - has stabilised since the start of the year after rising steadily for almost three years. Meanwhile, the spread between the market and auction prices for the dinar against the US dollar has also fallen since the start of the year, from 9.9% in December 2016 to 5.4% in August 2017.
|Stabilising Since Early 2017 Owing To Oil Recovery|
|Iraq - Auction And Market Exchange Rates To The US dollar, And M2/Reserve Ratio|
|Source: CBI, BMI|