Election's Results: Key Views Reaffirmed

BMI View: Preliminary results from Iraq's parliamentary election reinforce our view that a protracted period of coalition building will follow. Sectarian tensions will remain elevated in 2014 as a result, and delays in the approval of the 2014 budget will hinder the macroeconomic outlook. The overall outcome of the vote will not fundamentally alter Iraq's dysfunctional political system.

Preliminary results from Iraq's April 30 parliamentary election reaffirm our core view that although current Shi'a prime minister Nouri al-Maliki won a relative majority of votes, a protracted period of coalition building will follow ( see 'Election Primer: Vote Unlikely To Foster Fundamental Change', April 16').

Iraq's High Election Commission announced on May 19 that 62% of the 22mn eligible voters in the country cast ballots. Maliki's State of Law coalition won 92 of the 328 seats in the Council of Representatives. While Maliki won three more seats than in the previous election in 2010, he fell short of achieving the 165 seats needed to form a government. Maliki's victory was significantly aided by increasing fragmentation in Iraqi politics. His two main Shi'a rivals, the Mowatin party and the Ahrar movement - loyal to influential cleric Moqtada al-Sadr - won 31 and 28 seats respectively. Two smaller parties formed by Sadrist supporters drew a combined six additional seats, and could team up with Ahrar.

A Fragmented Polity
Iraq - Preliminary Results Of 2014 Parliamentary Elections

BMI View: Preliminary results from Iraq's parliamentary election reinforce our view that a protracted period of coalition building will follow. Sectarian tensions will remain elevated in 2014 as a result, and delays in the approval of the 2014 budget will hinder the macroeconomic outlook. The overall outcome of the vote will not fundamentally alter Iraq's dysfunctional political system.

Preliminary results from Iraq's April 30 parliamentary election reaffirm our core view that although current Shi'a prime minister Nouri al-Maliki won a relative majority of votes, a protracted period of coalition building will follow ( see 'Election Primer: Vote Unlikely To Foster Fundamental Change', April 16').

Iraq's High Election Commission announced on May 19 that 62% of the 22mn eligible voters in the country cast ballots. Maliki's State of Law coalition won 92 of the 328 seats in the Council of Representatives. While Maliki won three more seats than in the previous election in 2010, he fell short of achieving the 165 seats needed to form a government. Maliki's victory was significantly aided by increasing fragmentation in Iraqi politics. His two main Shi'a rivals, the Mowatin party and the Ahrar movement - loyal to influential cleric Moqtada al-Sadr - won 31 and 28 seats respectively. Two smaller parties formed by Sadrist supporters drew a combined six additional seats, and could team up with Ahrar.

The Sunni camp was also highly fragmented. The Mutahidun bloc led by the Sunni Arab speaker of parliament, Osama al-Nujaifi, ended up with 28 seats; former prime minister Iyad Allawi's Wataniyya list won 21; and Sunni Arab Deputy Prime Minister Saleh al-Mutlaq's Arabiyya Alliance got 10 seats. The two main Kurdish parties, the Patriotic Union of Kurdistan (PUK) and the Kurdish Democratic Party (KDP), won 21 and 25 seats respectively, while the Kurdish reformist Goran party won nine.

A Fragmented Polity
Iraq - Preliminary Results Of 2014 Parliamentary Elections

Lengthy Coalition Building Ahead

The majority of Iraqi political blocs are vocally opposed to supporting Maliki's re-election to a third term in office, largely as a result of his allegedly authoritarian style of governing. The Sadrist bloc recently reiterated that it will not support his candidacy, and the Sunni Wataniyya bloc said on May 18 it would not allow Maliki to stay for a third term. The Kurds have also repeatedly voiced their opposition to a new term for the premier.

That said, Maliki won a much larger amount of votes than potential rivals, and he remains the front runner for the post of prime minister, in our view. Indeed, the State of Law insisted on offering Maliki as the sole candidate for prime minister. However, it is clear that a long period of coalition building will follow, as the country's political blocs will engage in protracted horse trading. Following the previous parliamentary elections, which took place in March 2010, negotiations lasted approximately 10 months, with agreement on a coalition government not emerging until late December of that year. The level of political polarisation and fragmentation this year is more elevated, implying that negotiations could take an even longer period of time before a government is formed. This could potentially delay the approval of a new government into 2015.

Political Risks Remaining Prominent In 2014...

The level of political violence in Iraq has increased significantly over recent quarters. More than 7,800 Iraqi civilians were killed in 2013 - the most civilian deaths since the nearly 18,000 killed in 2007 at the height of the sectarian conflict - and at least 2,300 have been killed so far this year. With the political process remaining slow in 2014 and sectarian tensions elevated, radical Jihadist groups are likely to be highly active this year. Moreover, it is unclear whether the Iraqi military will be able to contain an ongoing rebellion in Anbar province, particularly as a good showing by the State of Law coalition in elections and fragmentation among Sunni blocs reinforce Sunni disillusionment with political institutions.

On The Up But Still Shy Of The Mark
Iraq Oil Production and Net Exports (000b/d)

For the time being, however, we believe that violence will not impede significant growth in oil production, with the largest fields located in the heavily protected south. We forecast oil production to average 3.4mn barrels per day (b/d) in 2014 and 3.9mn b/d in 2015, a 12.0% and 14.0% increase respectively.

...And Budget Talks To Be Further Delayed

The Iraqi parliament is unlikely to pass its 2014 federal budget any time soon, particularly as competing political blocs will use it as a bargaining tool in coalition building ( see 'Tensions To Delay Budget Approval', February 5). This will add to the government's low execution rates for investment expenditure by delaying the approval and completion of key investment projects. Given the country's need to modernise its infrastructure network, continued delays in budget approval bode poorly for Iraq's long-term macroeconomic outlook.

Institutional Fragility To Persist

The results of the elections reaffirm our view that the vote will not bring about much-needed change in Iraq's fragile political system. In order to win a third term, Maliki will have to nominally share power with potential coalition partners. However, we are sceptical that he will fundamentally alter his style of governing, and believe he will most likely use a third term as a means to further increase his authority. Even under a scenario whereby someone other than Maliki is nominated as prime minister, key political personalities and parties have changed little in the past decade. As a result, political institutions will remain fragile over the medium term, fuelling already-elevated sectarian tensions.

Risks To Outlook

The result of the vote poses significant risks both to the upside and the downside. For one, should talks over a new government be inconclusive for an extended period, Maliki could further manipulate Iraq's fragile democratic institutions to tighten his political grip. This could pave the way for a return to authoritarian rule, triggering widespread opposition and dramatically increasing risks of the country descending into full-blown civil war.

On the upside, we cannot preclude that elevated political polarisation could force Maliki to effectively share power with the opposition. This development could pave the way for a slow improvement in Iraq's dysfunctional political system, at the root of which lies the absence of basic consensus over how the country should be run. In particular, the Kurds could support a third term for Maliki in exchange for a deal on oil-sharing revenues, which could lead to increased exports from the Kurdistan region. That said, we stress that prospects for a rapprochement among Iraq's political blocs remain distant for now, and the system will likely remain fundamentally dysfunctional over the coming years.

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Sector: Country Risk
Geography: Iraq
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