Prolonged conflict will exacerbate security and economic risks
Route-to-market disruptions remain highly likely in Baghdad as protest activity continues in the short term. While Iraq’s investment outlook remains unchanged for now, an intensification of armed attacks on US infrastructure if the conflict persists, would cause already-fragile private and public sector sentiment toward Iraq to weaken. Further depreciation in the dinar’s market value will weaken overall consumption in Iraq and exacerbate operational difficulties by increasing the risk of payment delays and driving high import costs. Additionally, boycotts of US-affiliated brands remain highly likely.
Overview
- Hundreds of thousands of Iraqis held a pro-Palestine rally on October 13. Since then, supporters of the Sadrist movement and some armed factions held protests near the Iraqi-Jordanian border on October 20. Alongside this, more militias and supporters of the Coordination Framework gathered last week outside the Green Zone.
- At the start of the Israel-Hamas conflict, Iran-backed Shiite political parties and militias warned the US that they would target its assets in the region if it intervened directly. Since then, Iraqi militias have claimed responsibility for several drone and rocket assaults targeting US bases in the country, including the Ain al-Asad air base.
- Highly influential cleric Al Sadr has called for the closure of the US embassy in Iraq.
Our View
Demonstrations in Baghdad will continue to take place in the coming weeks as the conflict escalates. Alongside this, further action by Iran-backed armed groups against US assets in Iraq is highly likely. Further deteriorations in Iran/US relations will have negative spillover effects on Iraq’s banking sector, consequently impacting the Iraqi dinar. Stricter controls over transfers abroad from Iraq (likely to deter transfers into Iran) will continue to drive a gap between the dinar’s parallel and official rates, which have continued to fluctuate in recent months.
The risk of further instability in Iraq is directly correlated to Israel’s aggression levels against Gaza. Should the conflict escalate substantially, Iranian proxies in Iraq could initiate more active targeting of US assets in the country. In such a (downside) scenario, Iraq could become vulnerable to the conflict in Gaza spilling over into its borders (through attacks directly into Iraq) and raising insecurity levels. In any downside scenario, Israeli targeting of Iraqi oil infrastructure remains unlikely, thus Baghdad’s oil supplies should remain relatively insulated. However, Iran targeting the Iraqi Kurdistan region, which it claims has ties to Israel, is likely in this scenario. As such, any increase in hostilities increases misfires and unintended damage to oil facilities in both regions. For now, FrontierView expects the situation in Iraq to remain contained to protests and a small number of attacks on US targets in the country.
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