July 6, 2015 / 12:25 PM / 2 years ago

Iraq to tap retail investors in $5 bln domestic bond offer

DUBAI, July 6 (Reuters) - Iraq's government plans a domestic issue of $5 billion worth of bonds starting in the fourth quarter of this year as it seeks to relieve the pressure of low oil prices on its finances, an official told Reuters on Monday.

The medium-term notes, with maturities of between 12 and 18 months, will help to finance the budget deficit and be open to local banks, other institutions and retail investors, said Mudher Saleh Kasim, a former senior central bank official who advises Prime Minister Haider al-Abadi on financial policy.

Through years of conflict and upheaval, Iraqis have become used to hoarding large sums of foreign currency in their homes. The bond issue will seek to tap this hoard.

"It gives a unique opportunity to a group of investors who are cash-rich and essentially hoarders," Kasim said. "We think there will be good demand for investment."

The bonds will be denominated in U.S. dollars and issued in stages, according to investor demand. Investors will be able to choose to receive the principal on maturity in dollars or in dinars at a more attractive rate than the current market rate.

The plunge of oil prices since last year and Iraq's fight against Islamic State militants has put severe pressure on its finances; the government has projected a budget deficit of about $25 billion this year, in a budget of roughly $100 billion.

International reserves at the central bank fell to $66 billion at end-2014 from $78 billion at end-2013, according to the International Monetary Fund, and they may have dropped further since then.

This has started to put pressure on the Iraqi currency in the secondary market, which sank as low as 1,400 to the dollar in mid-June from 1,228 a week earlier. It was trading at 1,240 on Monday, dealers said. The central bank auctions dollars to banks and licensed traders at a fixed price of 1,166.

Abadi told local television channel Al Sumeria in mid-June that the dinar was "strongly backed and there's no fear about the exchange rate against the dollar".

But he added, "There's been speculation and scheming in recent days by those who are enemies of Iraq and finance corrupt people, and are trying to affect the current situation."

In addition to the domestic bond issue, Iraq has said it plans to raise $5 billion with an international bond issue this year. In early June, the IMF agreed to lend Iraq $833 million, and last week the finance ministry said the World Bank would provide loans totalling $1.7 billion. (Additional reporting by Archana Narayanan; Editing by Andrew Torchia)

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