Boston, MA -- (SBWIRE) -- 11/29/2012 -- Despite an investment focused and inflated budget for 2012 and a US$250bn-US$275bn investment plan for the five years following (2013-2017), we are maintaining our outlook for growth in Iraq's construction sector to underperform potential, with an annual average growth rate of 7.7% anticipated between 2012 and 2016. In order to incorporate these spending plans fully into our forecast we would need to see improvements in political relations, institutional capacity, budget execution rates and regulations. Until this point investment plans announced will be unlikely to be translated into industry value creation.

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Iraq's construction sector continues to grapple with the political and economic challenges of a post-war country. Despite a huge project pipeline - with the country attempting to mend its war-torn infrastructure and make up for decades of underinvestment - the business environment, economy and political climate continue to present challenges. The sheer number of projects under way and in the pipeline, including US$35bn in infrastructure alone, and the very low base, is precipitating high growth in the country's construction sector.

The government has repeatedly announced its intention to focus on infrastructure, especially electricity investments and housing, for which it has handed out multiple contracts. The 2012 budget (passed in February 2012) highlights this focus. The US$100bn budget is 21% larger than the budget of 2011, and includes US$32bn for investment projects. Investment into the electricity sector will increase 31% to US$5.6bn and spending on housing is up 10% to US$976mn.

Infrastructure allocations are expected to continue to be strong, following the announcement in September of a US$250-275bn investment plan to take place between 2013 and 2017. With limited details on financing or projects we have refrained from incorporating the announcement into our forecast. It does however present upside potential to our outlook over the medium term.

The potential for the infrastructure focused spending plans to make a tangible impact on our growth forecasts is uncertain. Whilst some sectors are seeing contracts progress and construction commence (housing in particular and lately electricity projects), others are seeing little to no progress (transport projects are at a standstill).

The key drags on the sector are:

- Political risk: the political situation is rapidly deteriorating and there are growing instances of sectarian violence, the issue of security could yet again become a prohibitive concern for investors, despite there being a notable improvement over recent years.

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