New market study, "Iraq Infrastructure Report Q2 2014", has been published

Iraq's already fragile business environment has worsened even further as violence has flared in the western province of Anbar. It is likely this will result in the exacerbation of poor government capacity. This has led us to downgrade our construction industry forecast to 9.6 from 10.6% real growth in 2014 on the previous year. That said, the reconstruction and development of Iraq's infrastructure continues and the construction industry will benefit from a sizeable investment plan and an inflated 2014 budget. However, low project completion rates are a result of government agencies' lack of accountability and technical capacity, as well as frequent delays in the approval of projects and the transfer of funds by the central government. The energy and utilities sector continues to see the most activity, along with housing, as the government seeks to placate a restive population and reduce the impediments subduing growth in Iraq's non-oil economy.

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Away from the institutional and security risks which will subdue growth in Iraq's construction sector, there are a number of factors which support our view for average year-on-year (y-o-y) growth of 7.3% over the 2014-2023 period. The national budget will stand at around US$150bn in 2014, representing an increase of around 25% on 2013. Again, investment expenditure is set to make up with majority of the budget, with infrastructure and housing account for the largest share - although the budget still has to navigate its way through parliament for approval during a time of extreme political unrest. The budget had large sums earmarked for investment into the power, housing and transport sectors. However, Iraq's poor business environment results in the large sums of money being promised rarely being fully utilised. Although the poor security situation in Iraq continues to deter foreign involvement in the market, more endemic problems such as corruption, a lack of institutional capacity and poor technical ability severely dent growth. To address these endemic problems the Ministry of Finance and the Ministry of Planning are looking to tackle the issue of low execution rates by making those with a rate of less than 25.0% liable for questioning by the parliament and the council of ministries. While such moves are encouraging for the construction sector, we believe the government's lack of control over local agencies and bureaucratic bottlenecks will impede the progress of development projects during the forecast period.

Developments which are underpinning our outlook for this quarter include:

* The development of the Grad Fao port near Basra will significantly boost construction in the region and has the potential to lead to Iraq becoming a major freight destination as companies may wish to transport goods overland instead of undergoing the long voyage to Suez. A US$700mn contract to build the port's breakwater has been awarded to Daewoo.

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