Some success in combating terrorist groups and a possible bottoming out of oil prices mean it could be time to invest in Iraq, analysts have said.
Iraqi bonds have made a partial recovery since January, but the market continues to price in an additional degree of risk, according to Alan Cameron, an economist at Exotix Partners. The boutique investment bank issued a "buy" alert on Iraqi benchmark U.S.-dollar 2028 bonds on Tuesday, following a "sell" notice back in September.
"It seems that an extra level of country risk is being embedded in Iraq specifically, perhaps because the market views its debt as unsustainable. Having once traded at only a small discount to other commodity exporters, the 2028s are now over 200 basis points wide of our basket," Cameron said in a report.
On Tuesday, the 2028 eurobonds, which were issued in 2006, traded at a cash price of 66.57 cents to the dollar and yielded 12.55 percent, according to Cameron. That compares with an average yield of 8.98 percent for other oil-exporting sovereigns in Exotix's universe.
The price of Iraq's eurobonds reached an all-time low in December 2008 of around 42 cents to the dollar. More recently, the bond has made a partial recovery from a low of roughly 59 cents reached in mid-January 2016.
"The latest recovery mirrors a general trend across other Gulf-based assets, as oil prices seem to start reaching bottom levels," Apostolos Bantis, an emerging market credit analyst at Commerzbank, told CNBC on Tuesday.
"Any further success with the military operations against terrorist militant groups in the northern part of the country, including liberation of Mosul and progress on the Syria peace talks, would be a positive catalyst and support further recovery on the Iraqi bond."
Iraq's economy is highly dependent on exporting crude oil, the price of which has fallen by more than 60 percent since mid-2014. However, prices have risen since falling below $30 per barrel in January and some analysts think prices will continue to gradually recover.
Furthermore, the International Monetary Fund may offer Iraq another aid program this year, as the country struggles with a rising debt burden and falling foreign exchange reserves. In January, Prime Minister Haider al-Abadi said Iraq hoped to secure $6 billion to $7 billion in loans from the fund, according to the Wall Street Journal.
Iraq's economy slipped into recession in 2014 and grew by only 0.5 percent in 2015, according to the World Bank, hit by the deteriorating security and political situation and the slump in oil prices. In February, Standard & Poor's said the Iraqi economy was weakening but affirmed its B-/B rating with a stable outlook.
On Tuesday, Exotix's Cameron said that "fair value" on Iraq's 2028 eurobond was close to 75 with a yield of 10.6 percent.
"We think that an upward re-rating of this magnitude is consistent with Iraq's fundamentals, even in a low oil price scenario; if the oil price were to continue rallying, the upside could be even more material," he said.