S&P places Iraq at risk of downgrade as Hormuz shutdown hurts oil output

March 17 (Reuters) - S&P Global placed Iraq's "B-" long-term sovereign credit rating on CreditWatch negative on Tuesday, citing the risk of a downgrade after a sharp drop in the country's oil output tied to escalating conflict in the Middle East.

Iraq's oil production dropped to about 1.2 million barrels per day (bpd) from 4.2 million bpd following the effective closure of the Strait of Hormuz since regional tensions intensified on Feb. 28.

The country holds the world's fifth-largest proven crude oil reserves and is OPEC+'s third-largest exporter after Saudi Arabia and Russia. Oil accounts for roughly 60% of Iraq's GDP, 90% of state revenue and 95% of merchandise export earnings.

S&P said a prolonged disruption in oil production would strain Iraq's fiscal and external positions through 2026, even with its sizable foreign-exchange buffers.

"The Iraqi government's fiscal position is highly sensitive to oil prices and revenue, with the temporary fall likely to cut government revenue and further curtail spending," S&P said.

The agency expects the government to draw down on its reserves to meet external debt obligations.

Iraq's international reserves stood at about $97 billion as of mid-February, equivalent to roughly 10 months of current account payments, with around a quarter held in gold.

S&P expects the buffer to support repayment of external commercial debt, including the country's sole outstanding $2.8 billion amortizing bond, restructured from pre-2003 debt.