By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Stop the Press: Just as this article was being readied for publication, the news came of a US strike in Baghdad that targeted a car carrying Iran’s top general and a senior commander of Iraq’s Paramilitarily Units (PMU). The attack raised the often-discussed spectre of a US-Iran proxy war fought in Iraq. While this is a real possibility, and events are extremely fluid, there a few points that should be taken into account amidst the breathless media coverage:

  • Angry rhetoric from Iran promising fire and brimstone is a given, however, irrespective of all the bluster, Iran cannot afford a direct or indirect full confrontation with the US given the severe weakness of its economy.
  • Iran’s false reading of the US’s hesitation to order a full strike a few months ago led it to push the envelope assuming the US would not retaliate. This attack, demonstrating the extreme extent to which the US will go to defend its interests, will force Iran to re-calculate especially given that the US will be in the midst of an election campaign that will likely see the re-election of the current administration.
  • The dilemma for Iran is the need to retaliate to save face, but without crossing the now abundantly clear US red line, or for that matter starting a wider conflict in the region that it can ill-afford to wage.
  • Iraqi politicians, especially some with sympathies to Iran will, after expressing their perquisite outrage over the violations of sovereignty and threats of revenge, realize that being placed in the same position as that of sanctioned Iran is not advantageous to them, to Iraq, or to Iran.
  • The recent decision by the Iraqi parliament regarding foreign military presence supports the argument made here, in that it’s high on theatrics, but low on substance. It was not a decision to end US military presence, but a typical Iraqi fudge. In essence, it’s a resolution asking the government to do five things, of which two are worth noting: (1) Cancel the request for global coalition support made in 2014; and (2) for the government to work towards ending the presence of all foreign troops. Crucially, the request for global coalition support in 2014 was made by the then government, without parliamentary oversight, and as such could have been cancelled directly by the government, yet it chose to pass the buck to parliament using the excuse of being a caretaker government, but parliament then passed it back. The next steps would involve a lot of noise and bluster, but most likely the resolution would be watered down to an aspiration once the uproar subsides.
  • Finally, within Iran, the government finds itself for the first time in a position to conduct a rational foreign policy, unlike the shadowy operations that were Iran’s effective de-facto foreign policy in the region. This will likely manifest through back channel diplomacy once the dust settles over the next few months.
  • However, the next few weeks are to be marked by a lot of noise and come with spurious threats and counter threats that are reminiscent of the fire and fury that marked the exchanges between the US and North Korea a few years ago, but this time taking place in the most volatile region in the world.

While these events are being played out, it’s worthwhile to look at the Iraq investment story purely on its own merit, especially as the stock market was up +1.5% for the year as of Tuesday 7th January and was building on the trends discussed below. Crucially the market price of the US versus the Iraqi Dinar has only moved up by about +2.0% above the levels for most of the last 20 months. After stabilising in early 2018, It has traded briefly at current elevated levels before the elections in May 2018, during the tanker hits during the summer, and finally, the recent attacks on Saudi oil installations.

(Source: Central Bank of Iraq, Iraqi Foreign Exchange Houses, Asia Frontier Capital)

The Iraqi equity market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), ended December up +2.6% and down –1.3% for the year. The outlook for the Iraqi equity market for 2020 will be shaped by the three events that marked 2019:

  • The equity market’s bottoming following a multi-year bear market
  • The increasing signs, at both a macro and company level, of an economic recovery
  • The repercussions of a youth led protest movement that is bringing with it profound changes (mostly positive) to the Iraq story culturally, politically and economically

Protest movement art in Baghdad’s Tahrir Square

(Source: Art by Yota Namir, Ra’ed Modah & Noor Namir, photo by Mohammed Ghani posted on Baghdad Projects’ Facebook page)

2019’s decline of –1.3% by the Rabee Securities RSISX USD Index (RSISUSD) comes on the back of declines of –15.0% in 2018, –11.8% in 2017, –17.3% in 2016, –22.7% in 2015, and –25.4% in 2014. The small scale of the 2019 decline, the improved market dynamics and the bottoming in trading turnover all point to a bottoming market formation after a brutal bear market that saw the index decline by –66.1% from the peak in early 2014 to the end of 2019.

The first of the market’s improved dynamics is its discriminating nature in evidence throughout the bank rally that started in May 2019, which at the time was led by a stunning rise in Iraq’s leading bank, the Bank of Baghdad (BBOB), which was  up +62.5% in May on hopes it would resume dividend payments for the year. These expectations led to other leading banks such as the National Bank of Iraq (BNOI), Mansour Bank (BMNS) and Commercial Bank of Iraq (BCOI) to join the rally. Subsequently, BBOB’s quarterly earnings results confirmed expectations that it is following through with the recovery in its fortunes that began in 2018 as part of the overall conditions in place for the sector’s future revival. Nevertheless, BBOB did not resume dividend payments for 2018’s earnings. However, unlike in prior years, BBOB declined from the May 2019 peak, yet did not lose all the gains– and more importantly while it pulled the other leading banks up with it in May, it did not drag them lower in the following months. By year end all of the leading banks were meaningfully higher than their pre-May rally lows.

Indexed performance: Bank of Baghdad – BBOB (black), Commercial Bank of Iraq – BCOI (purple), Mansour Bank – BMNS (blue), National Bank of Iraq – BNOI (green)

(Source: Bloomberg, data from 30/04/2019 – 31/12/2019)

The second aspect of the improved market dynamics is the broadening of breadth and the market’s focus on the hopes of an earnings recovery for some of the industrial stocks even before any signs of such recovery can be detected in their earnings report during 2019. This dynamic was evident in small industrial companies and in healthcare providers classified under the industrial sector on the Iraq Stock Exchange (ISX), as discussed here in the last few months. The chart below shows the price action of Al-Mansour Pharmaceuticals Industries (IMAP), Al-Kindi of Veterinary Vaccines Drugs (IKLV), National Chemical & Plastic (INCP), and Metallic & Bicycles Industries (IMIB).

Indexed performance: Al-Mansour Pharmaceuticals Industries- IMAP (green), Al-Kindi of Veterinary Vaccines Drugs- IKLV (black), National Chemical & Plastic – INCP (purple), Metallic & Bicycles Industries -IMIB (blue)

(Source: Bloomberg, data from 31/12/2018 – 31/12/2019)

Normally, cyclical stocks outperform defensive or growth stocks at the start of economic recoveries even though their earnings do not support this outperformance – at least initially. It can be argued that similar dynamics are taking place through the action of cyclicals on the ISX in 2019 such as the banks, mentioned earlier, versus those of market stalwart growth stocks – Pepsi bottler Baghdad Soft Drinks (IBSD) which was down –8% for the year, or for mobile telecom operator Asiacell (TASC) which straddles the cyclical and defensive sectors due to the specifics of its earnings drivers since 2014, which was up +12% in 2019. In contrast, in 2018 both were up +34% and +47% respectively, but the banks were down, such as BBOB –52%, BMNS ­–20%, BNOI –28%, BCOI –4%. Even though the analysis of cyclicals versus growth stocks can only go so far on the ISX, given its illiquidity and limited diversification, the logic of an economic recovery driving cyclical earnings is applicable.

This economic recovery was initially driven by the revival in government spending on goods and services and on wages, the evidence of which was seen in: (1) the upturn of the country’s exports and in new vehicle sales as reported here in October, and (2) the continued growth of broad money, or M2, as a proxy for economic activity as reported here in December.

Data from the Central Bank of Iraq (CBI) on private sector deposits and credit to the private sector support the above trends. These show private sector deposit growth of +12% for the year by end of September 2019 after a few years of no change, while credit to the private sector was up +3% for the period but should accelerate as the economy continues to recover.

(Source: Central Bank of Iraq, Asia Frontier Capital)

The above chart is based on aggregate data for the private sector with the banking system as a whole – both for state banks, and commercial sector banks which accounted in 2018 for 36% of total credit to the private sector and 37% of private sector deposits – and thus do not show the performances of specific commercial banks listed on the ISX.

Drilling down to the company level within the commercial banking sector, the earnings profile of the National Bank of Iraq (BNOI) for the first nine months of 2019 (9M/2019) demonstrates the above macro trends. For BNOI private sector deposits were up +54% in 9M/2019, while credit to the private sector was up +116% for the same period. Its pre-tax earnings for 9M/2019 hold promise for strong full year earnings – a long way to go before recovering to pre-crises levels– but supporting management’s bullish expectations for the year. While it’s not possible to extrapolate much from these results, or to generalize for the sector as a whole from them, they support in any case the argument that the conditions are in place for the sector’s recovery in 2020.

The macro and the micro trends discussed so far are affected by the youth protest movement that dominated all events in Iraq from the 25th of October 2019 after the initial wave of protests in early October. The protest movement forced the political elite to implement reforms that would threaten their interests – contrary to earlier expectations of the opposite. Parliament approved electoral reforms that if made into law would be a meaningful departure from the prior ones that largely allowed the political elite to maintain their oversized influence on successive government formations.

If the hoped-for early elections in 2020 are to be conducted under these electoral reforms they will most likely lead to the formation of the next government with a majority in parliament and parliamentary opposition, as opposed to the case since 2003 in which successive governments were composed of all parties in parliament. This was the root cause of the failures of the past to implement the reconstruction of the country, as each party pursued its own program within its own sphere of influence within an all-inclusive government.

These developments have yet to be played out and a lot of uncertainties remain, yet the near-term effect on the economy would be that the current caretaker government, while unable to act on capital spending plans, will follow up with implementing the current spending element of the 2019 expansionary budget. Moreover, it will continue to implement this budget in 2020 through the upcoming months of pre-election manoeuvring, elections, and post-election government formation. The government has plenty of firepower to fund this spending in the form of a 33-month cumulative surplus of about USD 28.9 bln that will increase in a firmer oil price environment. The most important consequence of this is the sustainable continuation of the consumer led economic recovery discussed in earlier paragraphs.

(Source: Iraq’s Ministry of Oil, Rabee Securities, Asia Frontier Capital)

(Data for oil revenues as of December 2019)

The stock market continues to look through the political developments to the upcoming economic recovery, and while it’s in the early process of forming a base it is worthwhile to point out its continued divergence from its past close relationship with oil revenues (a proxy for the forces driving the economy). This divergence is still at the widest it has been for the last few years and it is showing tentative signs of narrowing this divergence as the above chart shows.

For further reading, here are some interesting, relevant news links related to Iraq:

 

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

 

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Market Review: “Fundamentals on the Upswing, Market continues to Bottom”

The demonstrations which resumed in the last week of October persisted into November and seem likely to continue for some time yet. This contrasts with earlier expectations that they would run out of steam due to a combination of carrot, stick and fatigue, none of which, alone or in combination, dented the spirt of an increasingly sceptical youth movement.

The first to fail were the bundle of carrots in the form of successively enlarged government handouts over the course of the last few weeks. The sticks, in the form of an excessive government crackdown, failed too –  even though the cumulative causality list increased considerably to over 450 people dead and nearly 20,000 wounded, the bulk of which were demonstrators.

The expected fatigue turned out instead to be an explosion of art as the protest movement acquired its own symbolic art form expressed through large street murals, public performances, music and in particular the movement’s version of calligraffiti- a hybrid of calligraphy, typography, and graffiti.

Calligraffiti in Baghdad’s Tahrir Square

(Source: Photo by Mohammed Ghani posted on Baghdad Projects’ Facebook page)

The sheer number of casualties among the country’s youth, while not sufficient to shake the political class into action, caused an expression of extreme anger by the leading religious authorities that led to the resignation of the prime minister by month end. Consequently, there is an intense political manoeuvring among the political elite over the choice and form of a new government that would undertake the needed electoral reform, to be followed by early elections in 2020. Complicating matters is the extent of the compromises by the political elite to ensure that these elections would be a meaningful departure from the prior ones that largely allowed them to maintain their oversized influence on successive government formations.

While it is unlikely that the political elite will implement reforms that would threaten their interests, a consensus is emerging for making enough changes that would lead to the formation of future governments with a majority in parliament and parliamentary opposition, as opposed to the case since 2003 in which successive governments were composed of all parties in parliament, with neither a defined government programme nor any real opposition. This was the root cause of the failures of the past to implement the reconstruction of the country, as each party pursued its own program within its own sphere of influence within an all-inclusive government.

These developments have yet to be played out and a lot of uncertainties remain, yet the near-term effect on the economy would be that the current caretaker government, while unable to act on capital spending plans, will follow up with implementing the current spending element of the 2019 expansionary budget. Moreover, it will continue to implement this budget in 2020 through the upcoming months of pre-election manoeuvring, elections, and post-election government formation. The most important consequence of this is the sustainable continuation of the consumer led economic recovery that first manifested itself through the growth of Iraq’s imports, as discussed here in September 2019, to satisfy consumer demands.

The fuel for this consumer spending can be seen through the return of liquidity to the real economy, expressed through the continued growth of broad money, or M2, as a proxy for economic activity due to its sensitivity to oil revenues (chart below). The healing effects of a benign oil pricing environment in which the trailing twelve-month average Brent crude price is about USD 63/bbl, provided the wherewithal for the government to implement its expansionary budget for 2019 and probably into 2020.

(Source: Central Bank of Iraq, Iraq’s Ministry of Oil, Asia Frontier Capital)

(Note: M2 as of Sep. with AFC estimates for Oct.; Oil revenues as of Nov.)

The growth in M2, as reported here earlier in the year, first accelerated in May 2018 with a pick-up in year-over-year change every month as can be seen from the above chart. However, the current figures for M2 are stronger than discussed here earlier as the Central Bank of Iraq (CBI) upwardly revised the figures for M2 for each month for the last few years – as outlined in the summer release of its “Annual Statistical Bulletin for 2018”. The upshot is that M2’s recovery, while slightly less in year-over-year percentage growth, is taking place from a higher base and thus the amount of liquidity in the economy is larger than believed earlier.

Some of the effects of this liquidity were seen in the return of construction activity in Baghdad as reported here in AFC’s Iraq travel report in the summer. While this would be overshadowed by the demonstrations in Baghdad and the south of the country, this construction activity continues at an accelerated pace in the semi-autonomous Kurdistan Region of Iraq (KRI) which has not seen any demonstrations. While a far cry from the pre-crisis boom, the return of such activity is remarkable and promising for the region’s economy. Moreover, it should have positive implications for banks’ non-performing loans (NPL’s) given the size of construction related loans.

The stock market continues to look through the political developments and is probably beginning to take note of the return of this liquidity to the economy as it spent most of the month, as measured by the Rabee Securities RSISX USD Index (RSISUSD), at between –2.0% and –1.0% of the close of the previous month, to end the month down –1.5%, and down –3.8% for the year.

Encouragingly, the stock market’s dynamics followed through with the improvement discussed here over the last few months, as its breadth continued to broaden with a number of small industrial companies experiencing meaningful year-to-date gains. Like the healthcare providers covered in this report last month, small industrial companies experienced the best gains in the last few months in which the overall market began to stabilize. This dynamic can be seen in the performance of National Chemical & Plastic (INCP), Metallic & Bicycles Industries (IMIB) and Modern Sewing (IMOS), up +95.6%, +34.3% and +62.9% respectively for the year by end of November.

Year to date indexed performance: National Chemical & Plastic – INCP (green), Metallic & Bicycles Industries -IMIB (dark brown) and Modern Sewing – IMOS (blue)

(Source: Bloomberg, data as of 30 Nov. 2019)

Moreover, like the healthcare providers, the stock market is focusing on a revival in earnings for these companies even though the earning results for them show no evidence of such an earnings recovery. It should be noted that the stock prices of these companies benefit from their illiquidity, in particular IMIB did not trade between early August 2018 and early March 2019, and the +34.3% YTD change used is based on the last traded price of the stock in 2018.

A broadening market breadth as well as its increasingly discriminating nature, add to signs that it is bottoming after a brutal bear market in which the current YTD decline of –3.8% is on the back of –15.0% decline in 2018, –11.8% in 2017, –17.3% in 2016, –22.7% in 2015, and –25.4% in 2014.

A recovery following this bottom formation could see the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), claw back some of the −67.0% decline from the peak in early 2014 to November 2019 closing levels.

Extra reading:

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Market Review: “Fundamentals on the Upswing, Market continues to Bottom”

The demonstrations which resumed in the last week of October persisted into November and seem likely to continue for some time yet. This contrasts with earlier expectations that they would run out of steam due to a combination of carrot, stick and fatigue, none of which, alone or in combination, dented the spirt of an increasingly sceptical youth movement.

The first to fail were the bundle of carrots in the form of successively enlarged government handouts over the course of the last few weeks. The sticks, in the form of an excessive government crackdown, failed too –  even though the cumulative causality list increased considerably to over 450 people dead and nearly 20,000 wounded, the bulk of which were demonstrators.

The expected fatigue turned out instead to be an explosion of art as the protest movement acquired its own symbolic art form expressed through large street murals, public performances, music and in particular the movement’s version of calligraffiti- a hybrid of calligraphy, typography, and graffiti.

Calligraffiti in Baghdad’s Tahrir Square

(Source: Photo by Mohammed Ghani posted on Baghdad Projects’ Facebook page)

The sheer number of casualties among the country’s youth, while not sufficient to shake the political class into action, caused an expression of extreme anger by the leading religious authorities that led to the resignation of the prime minister by month end. Consequently, there is an intense political manoeuvring among the political elite over the choice and form of a new government that would undertake the needed electoral reform, to be followed by early elections in 2020. Complicating matters is the extent of the compromises by the political elite to ensure that these elections would be a meaningful departure from the prior ones that largely allowed them to maintain their oversized influence on successive government formations.

While it is unlikely that the political elite will implement reforms that would threaten their interests, a consensus is emerging for making enough changes that would lead to the formation of future governments with a majority in parliament and parliamentary opposition, as opposed to the case since 2003 in which successive governments were composed of all parties in parliament, with neither a defined government programme nor any real opposition. This was the root cause of the failures of the past to implement the reconstruction of the country, as each party pursued its own program within its own sphere of influence within an all-inclusive government.

These developments have yet to be played out and a lot of uncertainties remain, yet the near-term effect on the economy would be that the current caretaker government, while unable to act on capital spending plans, will follow up with implementing the current spending element of the 2019 expansionary budget. Moreover, it will continue to implement this budget in 2020 through the upcoming months of pre-election manoeuvring, elections, and post-election government formation. The most important consequence of this is the sustainable continuation of the consumer led economic recovery that first manifested itself through the growth of Iraq’s imports, as discussed here in September 2019, to satisfy consumer demands.

The fuel for this consumer spending can be seen through the return of liquidity to the real economy, expressed through the continued growth of broad money, or M2, as a proxy for economic activity due to its sensitivity to oil revenues (chart below). The healing effects of a benign oil pricing environment in which the trailing twelve-month average Brent crude price is about USD 63/bbl, provided the wherewithal for the government to implement its expansionary budget for 2019 and probably into 2020.

(Source: Central Bank of Iraq, Iraq’s Ministry of Oil, Asia Frontier Capital)

(Note: M2 as of Sep. with AFC estimates for Oct.; Oil revenues as of Nov.)

The growth in M2, as reported here earlier in the year, first accelerated in May 2018 with a pick-up in year-over-year change every month as can be seen from the above chart. However, the current figures for M2 are stronger than discussed here earlier as the Central Bank of Iraq (CBI) upwardly revised the figures for M2 for each month for the last few years – as outlined in the summer release of its “Annual Statistical Bulletin for 2018”. The upshot is that M2’s recovery, while slightly less in year-over-year percentage growth, is taking place from a higher base and thus the amount of liquidity in the economy is larger than believed earlier.

Some of the effects of this liquidity were seen in the return of construction activity in Baghdad as reported here in AFC’s Iraq travel report in the summer. While this would be overshadowed by the demonstrations in Baghdad and the south of the country, this construction activity continues at an accelerated pace in the semi-autonomous Kurdistan Region of Iraq (KRI) which has not seen any demonstrations. While a far cry from the pre-crisis boom, the return of such activity is remarkable and promising for the region’s economy. Moreover, it should have positive implications for banks’ non-performing loans (NPL’s) given the size of construction related loans.

The stock market continues to look through the political developments and is probably beginning to take note of the return of this liquidity to the economy as it spent most of the month, as measured by the Rabee Securities RSISX USD Index (RSISUSD), at between –2.0% and –1.0% of the close of the previous month, to end the month down –1.5%, and down –3.8% for the year.

Encouragingly, the stock market’s dynamics followed through with the improvement discussed here over the last few months, as its breadth continued to broaden with a number of small industrial companies experiencing meaningful year-to-date gains. Like the healthcare providers covered in this report last month, small industrial companies experienced the best gains in the last few months in which the overall market began to stabilize. This dynamic can be seen in the performance of National Chemical & Plastic (INCP), Metallic & Bicycles Industries (IMIB) and Modern Sewing (IMOS), up +95.6%, +34.3% and +62.9% respectively for the year by end of November.

Year to date indexed performance: National Chemical & Plastic – INCP (green), Metallic & Bicycles Industries -IMIB (dark brown) and Modern Sewing – IMOS (blue)

(Source: Bloomberg, data as of 30 Nov. 2019)

Moreover, like the healthcare providers, the stock market is focusing on a revival in earnings for these companies even though the earning results for them show no evidence of such an earnings recovery. It should be noted that the stock prices of these companies benefit from their illiquidity, in particular IMIB did not trade between early August 2018 and early March 2019, and the +34.3% YTD change used is based on the last traded price of the stock in 2018.

A broadening market breadth as well as its increasingly discriminating nature, add to signs that it is bottoming after a brutal bear market in which the current YTD decline of –3.8% is on the back of –15.0% decline in 2018, –11.8% in 2017, –17.3% in 2016, –22.7% in 2015, and –25.4% in 2014.

A recovery following this bottom formation could see the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), claw back some of the −67.0% decline from the peak in early 2014 to November 2019 closing levels.

Extra reading:

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Market Review: “Market continues to bottom, while breadth broadens”

Demonstrations resumed during the last week of October, following a two-week lull since they started. While the government has dialled down on its earlier excessive violence in response to these demonstrations, the cumulative causality list increased considerably to over 250 dead and over 10,000 injured.

However, the demonstrations continued to be mostly peaceful and the overall atmosphere has the feel of a carnival, especially in Baghdad’s Tahrir Square. There, Iraqis of all walks of life, social classes, sexes and ages, have taken to the square demanding the provision of services, economic prosperity and an end to corruption, and all the while celebrating their newfound sense of Iraqi nationalism that first emerged with the conclusion of the ISIS conflict.

Baghdad’s Tahrir Square by night

(Source: Karrar Al-Taie’s Facebook page)

The sheer number of people taking part in the protests is finally beginning to have an effect on the political class, which was hoping to wait out and buy the demonstrations through a series of ever-increasing handouts. A political consensus is emerging for the need to undertake serious reforms, address corruption and hold early elections after amending the electoral rules that largely allowed the same elite to maintain their oversized influence on successive government formations.

These changes, while unlikely to see the light of day in their entirety, will hasten the break-up of the ethno-sectarian monolithic blocs that were dominant over the past 16 years and which were at the root of Iraq’s past instability. In the process they will break the political logjam that was behind the failures of the past to implement the reconstruction of the country.

The most important consequence of the emerging consensus is either the resignation of the government, or a serious effort at amending the election rules leading to early elections. Whichever permutation emerges, it will lead to a caretaker government, followed by a return of government paralysis and fears of a replay of the events that held back the economy in 2018 and the first half of 2019 as discussed here over the last few months.

However, there are crucial differences between now and then. The first is that an upcoming caretaker government, while unable to act on capital spending, will follow up with implementing the current spending plans of the 2019 expansionary budget. Moreover, it would continue to implement this budget in 2020 throughout the upcoming months of pre-election manoeuvring, elections, and post-election government formation. The most important consequence of this is the continuation and sustainability of the consumer led economic recovery that first manifested itself through the sharp increase of Iraq’s imports, as discussed here last month, to satisfy growing consumer demands.

The freeze of capital spending is a negative factor, suspending its intended effect of turning an upcoming three to four year consumer-led economic recovery into a multiyear economic boom. However, mitigating this negative is the fact that a future capital spending freeze is undistinguishable from the current lack of such spending. The Ministry of Finance’s (MoF) latest data as of August reveal a total non-oil capital spending of about USD 1.3 bln from a budgeted USD 11.25 bln for the whole year.

The same data shows a continued build-up of the budget surplus of about USD 7.2 bln for 2019 by end of August, or a cumulative 32-month surplus of USD 30.3 bln. This would provide the wherewithal for an upcoming government to embark on a significant capital spending plan that it can use to solidify its position as the government that would meet the people’s expectations. An un-intended consequence of the current government’s paralysis is the elimination of the temptation to spend its way out of the crises by ever increasing handouts at the expense of capital spending.

The market seems to look to the future through these developments, as it spent most of the month, as measured by the Rabee Securities RSISX USD Index (RSISUSD), fluctuating +/− 1% within the close of the prior month, to end October at +1.9%, and down −2.3% for the year. Encouragingly, the market’s dynamics followed through with the improvement discussed here over the last few months as its breadth continued to broaden beyond the banks, which came to the forefront this year, or that of the high-quality leadership of Pepsi bottler Baghdad Soft Drinks (IBSD) and mobile operator AsiaCell (TASC) that outperformed in 2018. This broadening is seen in many sectors that are leveraged to a consumer recovery and/or to an expansionary government budget.

A group that stands to benefit from an expansionary budget, are the healthcare providers, which depend on government health service expenditures to drive their earnings growth. The government curtailed all such outlays following the twin crises of the ISIS conflict and the collapse in oil prices in 2014, with devasting consequences for the companies that depend on such spending. The market began to focus on the sector in the last few months with expectations that such, hoped for, spending would be manifested in the group’s future earnings – even though the earnings results for most of the companies show no evidence of such earnings recovery as of yet. It’s worth noting that  healthcare expenditures would be part of the provision of goods and services in the current budget section, and not from capital investments, and as such should not be affected by a future government paralysis. This dynamic can be seen in the stock price performance of Al-Mansour Pharmaceuticals Industries (IMAP) and AL- Kindi of Veterinary Vaccines Drugs (IKLV), which were up +43.8% and +28.8% respectively year to date, with most of the performance taking place in the last few months during which the overall market began to stabilize, as can be seen from the chart below:

Year to date indexed performance: Al-Mansour Pharmaceuticals Industries

– IMAP (green), AL- Kindi of Veterinary Vaccines Drugs- IKLV (orange)

(Source: Bloomberg, data as end of 31/10/2019)

Whilst the market is in the early process of forming a base it is worthwhile to point out its continued divergence from its past close relationship with oil revenues (a proxy for the forces driving the economy). This divergence is still at the widest it has been for the last few years, and it is showing tentative signs of narrowing this divergence (see below).

(Sources: Iraq’s Ministry of Oil, Rabee Securities, Asia Frontier Capital)

(Note: Oil revenues as of Sep, AFC estimates for Oct)

 

Extra reading:

Coverage of the nature and breadth of the demonstrations in Tahir Square, has been provided by a number of Iraqi photographers on their Facebook pages.

Some of these photographers are:

Ziyad Matti, Mohammed Aladdin, and Karrar Al Taiee

The following links, a photo album, a video, and an article are provided below:

 

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

From Peace to prosperity:

The Conference to find out what’s happening for Iraq business.

The Iraq Britain Business Council (IBBC) Autumn Conference in Dubai on December 8th is set against a backdrop of relative peace and security in Iraq, and the prospect of oil revenues surging through the economy is driving a wider range of business opportunities and a prospective 8% increase in GDP.

Peace is enabling the economy to diversify through the revenues that pay for a range of infrastructure projects. So this Autumn we are focusing on a range of sectors set to benefit from a stable Iraq: namely, Water, Transport and Logistics, Energy and Tech.

The recent protests have also spurred on Government reforms and incentives to drive employment, entrepreneurship and service diversity, and increase the volume of opportunity that lies ahead and the prospects for not just business-to-business but also a burgeoning consumer market.

The Iraqi Electricity Minister will likely be speaking about his reforms to open up the market to SME’s, training and new players. Other ministers including those from Construction and Transport are attending.

The recent announcement of a 10year tax-free period for SMEs in Iraq will also stimulate the Tech entrepreneur market and drive the uptake of engineering skills.

At this conference, we will discuss big-picture economics with Professor Frank Gunter (Lehigh University), Ahmed Tabaqchali (AFC Iraq Fund), and Simon Penny (UK Trade & Investment), who will address the economic backdrop in the Middle East, and the context for Iraq in particular.

The World Bank and Wood Plc will cover the water sector, while Rolls Royce, Basra Gateway Terminal (BGT), and Menzies will look at transport and logistics, and Iraq’s Electricity Minister, GE, Siemens and Enka will focus on energy.

Alongside the conference our Tech Forum brings experts on HealthTech and Educational Tech, including speakers from GE, Siemens Healthcare, KPMG, EY, Google and the British Council, among others.

While key opportunities will be outlined, the real opportunity for business is to meet the people directly involved in contracts and supply-chain opportunities. This is the place to do business, to network and to find out what’s happening in the Middle East’s most potentially dynamic market that is Iraq.

For further information and to find the latest updates on speakers – more are expected – please contact  london@webuildiraq.org or visit the website to register for tickets.

https://iraqbritainbusiness.org/event/autumn-conference-at-the-address-hotel-dubai

The year it’s all on the up…

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Market Review: “The Economy, the Protest Movement and the Government”

In early October Iraq, Baghdad in particular, erupted in massive demonstrations, that at the time of writing led to over 110 civilian deaths and over 6,000 casualties. Demonstrations demanding the provision of services, economic prosperity and an end to corruption have been a feature of the Iraqi scene since 2010. However, they have grown in tempo, peaked in last year’s Basra’s demonstrations, and reignited again in October as a young and angry population ran out of patience with the government’s sclerotic pace of reform.

The government’s heavy-handed and over the top response to the protests, very much like last year in Basra, has angered the youth and transformed the protests into riots. While a worrying development that risks an escalation of violence and potentially a much larger conflict, these protests will likely run out of steam due to a combination of carrot, stick and fatigue, just like last year’s then deadly protests. (*)

The carrot element began to take shape with the government’s initial package of handouts in the form of payments, training programmes and subsidised loans for the unemployed youth, as well as subsidized housing for the country’s poor. The scope of these would be enlarged significantly over the course of the next few weeks as the government tries to appease an increasingly sceptical youth movement.

These handouts, whichever shape they take, would be overshadowed by the government’s plans for an expansionary budget for 2020, that would be on a much larger scale than that communicated by the government to the IMF over the summer.

The government has ample resources to implement all of these, as it has achieved a 31-month budget surplus of USD 27.5 bln by the end of July 2019 as shown by the Ministry of Finance’s latest data. Though, the impetus for it to act is driven by effects of the multi-year protest movement that had a profound effect on how the 2018 election was fought and the current government formation, as it led to the beginning of the break-up of the ethno-sectarian monolithic blocs that were dominant over the past 16 years and which were at the root of Iraq’s past instability.

An expansionary 2020 budget on the heels of 2019’s expansionary budget would likely fuel consumer spending and potentially lead to a stronger than expected consumer-led 3-4 year economic recovery.  Which could become a sustainable multi-year economic expansion should the government begin to implement a much-needed reconstruction and investment spending program in the non-oil economy.

The early signs of a consumer led economic recovery can be seen from the latest economic data for 2018 as reported by the Central Bank of Iraq (CBI) in its recently released “Annual Statistical Bulletin for 2018”. The Bulletin showed that Iraq’s imports were up +18% in 2018, on the back of the recovery of +13% that began in 2017, following the severe declines from 2014-2016 which were caused by the twin shocks of the ISIS war and the collapse in oil prices crushing the economy, and with-it Iraq’s domestic demand for goods.

The revival in imports in 2017 and 2018 is likely to be a function of a recovery of government spending and a tentative recovery in consumer spending with the resultant increase in demand for imports- as the country is heavily reliant on imports to satisfy domestic demand. Importantly, the growth in imports of machinery and transport equipment argue well for the health of the underlying economic activity as can be seen from the chart below.

Iraq’s Imports 2010-2018

(Sources: Central Bank of Iraq (CBI), Asia Frontier Capital)

Confirming this recovery, is the data on “New Vehicle Sales” as reported by the International Organization of Motor Vehicle Manufacturers, which were up +60% in 2018 on the back of +35% increase in 2017. The recovery, while from a very low base, is nevertheless encouraging.

(Source: International Organization of Motor Vehicle Manufacturers, Asia Frontier Capital)

The market’s action during the demonstrations has been mostly subdued as the curfews and the government’s shutting of the internet had a negative effect on activity and prices drifted lower with the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), declining by about −0.7% month-month as of the time of writing.

However, September ended on a promising note, as the market was up +0.8% for the month and down −4.1% for the year. Average daily turnover declined −7% month-month and displaced last month as the third lowest level over the last five years. Foreign investors continued to be net buyers, consistent with the trend of the last few months, although at lower total levels, in-line with the decline in total turnover as can be seen in the chart below.

Index of net foreign activity on the Iraq Stock Exchange

(Sources: Iraq Stock Exchange (ISX), Asia Frontier Capital)

During September, the market’s dynamics followed through with the improvement discussed last month as the banking sector continues to be led by the National Bank of Iraq (BNOI) which was up +39.1%, with other leading banks trailing behind, such as the Bank of Baghdad (BBOB) up +3.4%, Commercial Bank of Iraq (BCOI) up +2.1%, while Mansour Bank (BMNS) was down −1.5%. However, it should be noted that the rallies in the banks were all on low turnover in-line with the market’s overall exceptionally low turnover. The return of liquidity will determine the true direction of the group- whether sellers will overwhelm buyers sending prices lower, or if buyers will overwhelm sellers sending prices higher. The discriminating nature of the market, discussed here over the last two months, argues for the later.

Further reading:

 

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

The market drifted lower in an Eid-holiday shortened month, as turnover declined substantially from July. However, life found its way back to the banks. For the month, the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), was down −0.95% and down −4.89% for the year.

Average daily turnover declined −40% month-month and was the third lowest level over the last five years- the others being April 2019 and September 2018 as can be seen from the chart below. Foreign investors continued to be net buyers, consistent with the trend of the last few months, although at lower total levels in-line with the decline in total turnover.

(Sources: Iraq Stock Exchange (ISX), Rabee Securities, Asia Frontier Capital)

The market’s dynamics continue to improve with the return of life to the banking sector, which as a group cooled-off over June and July after a powerful rally in May led by the Bank of Baghdad (BBOB). This month, the group was led by the National Bank of Iraq (BNOI), which was up +21.1% for the month and up +58.6% from the April close before the sector started its rally.

Moreover, its earnings report for the second quarter 2019 (Q2/2019) supported management’s bullish outlook for 2019 as expressed in its latest AGM. As reported here, in June’s update, while management decided not to distribute dividends for a challenging 2018, it indicated the possibility of resuming dividend payments for 2019 based on its strong results for the first half of the year, as well as positive expectations for the second half.

BNOI’s first half 2019 (H1/2019) results show customer deposits were up +28% year to date, while its loan book was up +77% for the same period. Pre-tax earnings for the second quarter were up +48% sequentially, with the year to date figure showing promise for the year – a long way to go before recovering to pre-crises levels- but supporting management’s expectations for the resumption of dividend payments for 2019’s earnings.

While it’s not possible to extrapolate much from these results, or to generalize for the sector from them, they support in any case the thesis, made here in the last few months, which argues that the conditions are in place for the sector’s recovery in 2019-2020. The Commercial Bank of Iraq’s (BCOI) Q2/2019 earnings, while supporting this thesis, nevertheless show the unevenness of these conditions given the different circumstances of each bank. BCOI’s consumer deposits in H1/2019 were up +6% year to date, while its loan book declined by −7% – however, BCOI’s loan book is insignificant at under 8% of its deposits. BCOI was up +4.4% for the month and up +17.5% from the April close before the sector started its rally.

The most interesting development for the sector during the month was the trading action in the Bank of Baghdad (BBOB), which at some stage was up +10.7%, before trimming most of these gains, to end up +3.6%. This comes on the back of its four-month wild ride, during which it rallied +62.5% in May, declined −12.8% in June, declined a further −17.6% in July, to end in August up +20.8% from the pre-rally close.

The stock’s ride started on speculative hopes that BBOB would resume dividend payments for its 2018 results, sputtered as BBOB poured cold water over these speculative hopes during its recent AGM, but seems to still have plenty of fuel left. This could imply that the market is looking past the bank’s difficulties and focusing, instead, on the prospects of a bank following through with the recovery in its fortunes that began in 2018 as part of the overall conditions in place for the sector’s future revival.

The market’s looking past the weaknesses of BBOB is a further positive aspect of its improving dynamics as pointed here last month “While, BBOB pulled the other leading banks up with it in May, it did not drag them lower in June and July which is very different than the market’s responses to such disappointments in 2018. That time all banks were painted by the same brush, which shows a market that has begun to discriminate showing it has likely bottomed or is making a bottom.” The year to date chart below for four leading banks shows these very different responses.

Year to date indexed performance: Bank of Baghdad – BBOB (green), Commercial Bank of Iraq – BCOI (blue), Mansour Bank – BMNS (mauve), National Bank of Iraq – BNOI (brown)

(Source: Bloomberg)

The early picture of the trading activity in September suggests that it will likely be in-line with that of August. Whilst the market is in the early process of discounting the banking sector’s recovery, it’s worthwhile to point out its continued divergence from its past close relationship with oil revenues (a proxy for the forces driving the economy) – still at the widest it has been for the last few years (see below).

(Sources: Iraq’s Ministry of Oil, Rabee Securities, Asia Frontier Capital)

(Note: Oil revenues as of Jul, AFC estimates for Aug)

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

The market’s action in July was so quiet that it turned activities like watching paint dry into spectator sports, as the start of the peak summer and holiday season depressed trading volumes.

Nonetheless, the average daily turnover’s decline of −15% month-on-month did not erase the turnover gains made in the prior two months, small as they were.

For the month, the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), was down −4.40% and down −3.97% for the year.

The highlight of the month, though, was the release of the latest IMF country report for Iraq, in which the IMF updated its estimates, last made in the summer of 2017, for both the future economic outlook and for the last few years. The changes to its GDP growth estimates for the crisis years 2014-2017 were as follows:

Year 2014 2015 2016 2017
Old estimates +0.7% +4.8% +11.0% -0.4%
New estimates +0.7% +2.5% +15.2% -2.5%

While estimates for the years following the conflict changed as follows:

Year 2018 2019 2020 2021
Old estimates +2.9% +1.7% +2.0% +2.1%
New estimates -0.6% +4.6% +5.3% +2.6%

The main takeaway is that the crisis years were, on the whole, weaker than initially expected. While, 2018, the first year following the conflict, was the second year of a deep recession with a contraction of -0.6% on the back of the prior year’s -2.5% decline, instead of being a first year of an economic recovery, at +2.9%, following a shallower decline of -0.4%  -a message telegraphed by companies listed on the Iraq Stock Exchange (ISX) over the last two years. On the other hand, the expected recovery in 2019/2020 would be much stronger than estimated earlier with GDP growing at +4.6%/+5.3% instead of +1.7%/+2.0%.

Higher oil exports and the improved oil pricing environment, over the last two years, resulted in much higher government revenues, than estimated earlier, from 2017 onwards. This, with a long lag, is initially translating into increased consumer spending in 2019, given that the government employs over 50% of the working population. This, would then, be followed by the government’s investment spending powering the non-oil economy. Subsequently, the IMF’s new assumptions on non-oil GDP growth rates are crucial for the economy and the stock market. The IMF’s estimates for the severe contraction in non-oil GDP during the crisis years changed as follows:

Year 2014 2015 2016 2017
Old estimates -3.9% -9.6% -8.1% +1.5%
New estimates -3.9% -14.4% +1.3% -0.6%

Accordingly, the downward trajectory in 2015 was much steeper at −14.4% than earlier estimates of −9.6%, while the stability expected for 2017 was, instead, a double dip recession following the bounce in 2016. Also, the contraction lasted longer at four years than earlier expectations of three years. While estimates for the years following the conflict changed as follows:

Year 2018 2019 2020 2021
Old estimates +2.0% +3.0% +3.9% +4.0%
New estimates +0.8% +5.4% +5.0% +4.1%

Confirming the earlier message that 2018 was the second year in a contraction with the non-oil GDP dragging the overall GDP down, negating the strong contributions of higher oil prices and exports to the overall GDP growth. Subsequently, the expected recovery for 2019/2020 would be much stronger at +5.4%/+5.0% versus earlier estimates of +3.0%/+3.9%. The changes, for outlook for non-oil GDP growth, are consistent with the analysis, made here over the last few months, on the drag on the economy in 2018 and early 2019 as a result of the political paralysis before, during, and after the May 2018 parliamentary elections. A paralysis that would have ended in March as the 2019 budget was only passed into law in late February 2019.

Furthermore, the IMF estimates that non-oil investment spending for 2019 would be about USD 11.25bln, or an +8.5% stimulus to the new non-oil GDP estimate for 2019. It’s unlikely, that the government would be able to spend all of the budgeted amount in 2019, given the slow nature of investment spending, and the government’s historic under-execution of such spending. Which probably explains the IMF’s estimates for investment spending at about 13.5% less than that projected by the 2019 government budget.

(Source: IMF, country reports no. 17/251 and 19/248, Asia Frontier Capital)

On the heels of the new IMF report, the Ministry of Finance (MoF) data as of May, show a month-on-month growth in investment spending of +20%, but from a very small base, as the January-May investment spending is only about 8% of the non-oil investment spending budget of USD 11.25bln. Implying that most of the estimated +5.4% growth in non-oil GDP for 2019 would be backend loaded, and thus a much stronger growth is anticipated in the second half of 2019 than the first half. It will likely accelerate further in 2020, as the unfinished spending for 2019 spills over into 2020. The government has considerable firepower at its disposal to continue investment spending, even as it continues to under-execute, as the same MoF data for May shows a further growth in budget surplus for 2019 at USD 3.3bln, for a cumulative 29-month surplus of USD 26.5bln.

As postulated here in the past, this investment spending which started with a trickle in 2019, should grow as the full spending gets underway, carrying over into 2020, and ultimately would lead to a sustained economic recovery in line with the new IMF’s future outlook, or probably somewhat higher given the multiplier effects of such spending.

The news from the corporate world supports the economic picture painted by the IMF as evidenced from a number of corporate earnings reports for the second quarter. Pepsi bottler, Baghdad Soft Drinks (IBSD), continued its strong growth with revenues for the six months in 2019 up +3% over the same period in 2018, with its pre-tax profits for the same period up +9%. Telecom operators AsiaCell Communications (TASC) and Zain Iraq (TZNI) reported increased customers by 6% and 4% respectively for the six months in 2019 versus the same period in 2018. However, both revenues and earnings continued, for the same period, to show an industry in the early stages of recovery with TASC having flat revenues but earnings before interest depreciation and amortization (EBITDA) down −9%, while TZNI reported revenues declining −6% and EBITDA up +13%. Both companies cited increased competition and marketing costs.

Bank of Baghdad’s (BBOB) second quarter (Q2) numbers, marked a bank following through with the recovery that began in 2018, which, while confirming the initial signs of a gradual recovery in the sector, also disappointed local speculators who were hoping for a repeat performance of the first quarter (Q1). Deposits continued to grow at +4.3% for the first half of 2019 versus the same period in 2018, while credit growth continued to be negative at −1.4%- which is a slower rate compared with the past- and led to a drop of −27.1% in net interest income. FX income recovered +57.0%, which is an easy comparison given the severe drop seen in the same period in 2018, but nevertheless pointing to a stabilization in this income source. Commission income, continuing to rise in importance, was up +21.3%. Net income, while up +983% in the period or at over 10x the figure for the same period in 2018, while very healthy, was mostly achieved in Q1. Therfore, while Q2’s net income showed continued growth, it nevertheless poured cold water over speculative hopes for the bank to resume dividend payments for 2018’s earnings. It was these hopes that led to a +62.5% rally in the stock in May, which soon moderated to a decline of −12.8% in June, and declined a further −17.6% in July as the bank confirmed in its AGM that it would not pay dividends for the year. The stock’s closing price in July, is still up +16.6% from the April close before it started its wild three-month ride. While, BBOB pulled the other leading banks up with it in May, it did not drag them lower in June and July which is very different from the market’s responses to such disappointments in 2018. That time all banks were painted by the same brush, which shows a market that has begun to discriminate showing it has likely bottomed or is making a bottom.

Trading activity in August will likely continue to be in-line with that of July’s activity, as it is part of the peak of the summer season and will include the second Eid holiday break of the year. While, there is no new source of liquidity in the market, and local speculators continue to dominate activity, foreign investors have been consistent net buyers over the last few of months in a marked contrast from the picture for most of the prior months as the chart below shows.

Index of net foreign activity on the Iraq Stock Exchange (ISX)

(Source: Iraq Stock Exchange (ISX), Asia Frontier Capital)

The extension of the June pull-back in July, continues to suggests the beginning of a consolidation phase, which would need a significant recovery in turnover before a recovery can become sustainable and for the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), to claw back some of the −70.5% decline from the peak in early 2014 to July’s 2019 closing levels.

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

The market’s action in July was so quiet that it turned activities like watching paint dry into spectator sports, as the start of the peak summer and holiday season depressed trading volumes.

Nonetheless, the average daily turnover’s decline of −15% month-on-month did not erase the turnover gains made in the prior two months, small as they were.

For the month, the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), was down −4.40% and down −3.97% for the year.

The highlight of the month, though, was the release of the latest IMF country report for Iraq, in which the IMF updated its estimates, last made in the summer of 2017, for both the future economic outlook and for the last few years. The changes to its GDP growth estimates for the crisis years 2014-2017 were as follows:

Year 2014 2015 2016 2017
Old estimates +0.7% +4.8% +11.0% -0.4%
New estimates +0.7% +2.5% +15.2% -2.5%

While estimates for the years following the conflict changed as follows:

Year 2018 2019 2020 2021
Old estimates +2.9% +1.7% +2.0% +2.1%
New estimates -0.6% +4.6% +5.3% +2.6%

The main takeaway is that the crisis years were, on the whole, weaker than initially expected. While, 2018, the first year following the conflict, was the second year of a deep recession with a contraction of -0.6% on the back of the prior year’s -2.5% decline, instead of being a first year of an economic recovery, at +2.9%, following a shallower decline of -0.4%  -a message telegraphed by companies listed on the Iraq Stock Exchange (ISX) over the last two years. On the other hand, the expected recovery in 2019/2020 would be much stronger than estimated earlier with GDP growing at +4.6%/+5.3% instead of +1.7%/+2.0%.

Higher oil exports and the improved oil pricing environment, over the last two years, resulted in much higher government revenues, than estimated earlier, from 2017 onwards. This, with a long lag, is initially translating into increased consumer spending in 2019, given that the government employs over 50% of the working population. This, would then, be followed by the government’s investment spending powering the non-oil economy. Subsequently, the IMF’s new assumptions on non-oil GDP growth rates are crucial for the economy and the stock market. The IMF’s estimates for the severe contraction in non-oil GDP during the crisis years changed as follows:

Year 2014 2015 2016 2017
Old estimates -3.9% -9.6% -8.1% +1.5%
New estimates -3.9% -14.4% +1.3% -0.6%

Accordingly, the downward trajectory in 2015 was much steeper at −14.4% than earlier estimates of −9.6%, while the stability expected for 2017 was, instead, a double dip recession following the bounce in 2016. Also, the contraction lasted longer at four years than earlier expectations of three years. While estimates for the years following the conflict changed as follows:

Year 2018 2019 2020 2021
Old estimates +2.0% +3.0% +3.9% +4.0%
New estimates +0.8% +5.4% +5.0% +4.1%

Confirming the earlier message that 2018 was the second year in a contraction with the non-oil GDP dragging the overall GDP down, negating the strong contributions of higher oil prices and exports to the overall GDP growth. Subsequently, the expected recovery for 2019/2020 would be much stronger at +5.4%/+5.0% versus earlier estimates of +3.0%/+3.9%. The changes, for outlook for non-oil GDP growth, are consistent with the analysis, made here over the last few months, on the drag on the economy in 2018 and early 2019 as a result of the political paralysis before, during, and after the May 2018 parliamentary elections. A paralysis that would have ended in March as the 2019 budget was only passed into law in late February 2019.

Furthermore, the IMF estimates that non-oil investment spending for 2019 would be about USD 11.25bln, or an +8.5% stimulus to the new non-oil GDP estimate for 2019. It’s unlikely, that the government would be able to spend all of the budgeted amount in 2019, given the slow nature of investment spending, and the government’s historic under-execution of such spending. Which probably explains the IMF’s estimates for investment spending at about 13.5% less than that projected by the 2019 government budget.

(Source: IMF, country reports no. 17/251 and 19/248, Asia Frontier Capital)

On the heels of the new IMF report, the Ministry of Finance (MoF) data as of May, show a month-on-month growth in investment spending of +20%, but from a very small base, as the January-May investment spending is only about 8% of the non-oil investment spending budget of USD 11.25bln. Implying that most of the estimated +5.4% growth in non-oil GDP for 2019 would be backend loaded, and thus a much stronger growth is anticipated in the second half of 2019 than the first half. It will likely accelerate further in 2020, as the unfinished spending for 2019 spills over into 2020. The government has considerable firepower at its disposal to continue investment spending, even as it continues to under-execute, as the same MoF data for May shows a further growth in budget surplus for 2019 at USD 3.3bln, for a cumulative 29-month surplus of USD 26.5bln.

As postulated here in the past, this investment spending which started with a trickle in 2019, should grow as the full spending gets underway, carrying over into 2020, and ultimately would lead to a sustained economic recovery in line with the new IMF’s future outlook, or probably somewhat higher given the multiplier effects of such spending.

The news from the corporate world supports the economic picture painted by the IMF as evidenced from a number of corporate earnings reports for the second quarter. Pepsi bottler, Baghdad Soft Drinks (IBSD), continued its strong growth with revenues for the six months in 2019 up +3% over the same period in 2018, with its pre-tax profits for the same period up +9%. Telecom operators AsiaCell Communications (TASC) and Zain Iraq (TZNI) reported increased customers by 6% and 4% respectively for the six months in 2019 versus the same period in 2018. However, both revenues and earnings continued, for the same period, to show an industry in the early stages of recovery with TASC having flat revenues but earnings before interest depreciation and amortization (EBITDA) down −9%, while TZNI reported revenues declining −6% and EBITDA up +13%. Both companies cited increased competition and marketing costs.

Bank of Baghdad’s (BBOB) second quarter (Q2) numbers, marked a bank following through with the recovery that began in 2018, which, while confirming the initial signs of a gradual recovery in the sector, also disappointed local speculators who were hoping for a repeat performance of the first quarter (Q1). Deposits continued to grow at +4.3% for the first half of 2019 versus the same period in 2018, while credit growth continued to be negative at −1.4%- which is a slower rate compared with the past- and led to a drop of −27.1% in net interest income. FX income recovered +57.0%, which is an easy comparison given the severe drop seen in the same period in 2018, but nevertheless pointing to a stabilization in this income source. Commission income, continuing to rise in importance, was up +21.3%. Net income, while up +983% in the period or at over 10x the figure for the same period in 2018, while very healthy, was mostly achieved in Q1. Therfore, while Q2’s net income showed continued growth, it nevertheless poured cold water over speculative hopes for the bank to resume dividend payments for 2018’s earnings. It was these hopes that led to a +62.5% rally in the stock in May, which soon moderated to a decline of −12.8% in June, and declined a further −17.6% in July as the bank confirmed in its AGM that it would not pay dividends for the year. The stock’s closing price in July, is still up +16.6% from the April close before it started its wild three-month ride. While, BBOB pulled the other leading banks up with it in May, it did not drag them lower in June and July which is very different from the market’s responses to such disappointments in 2018. That time all banks were painted by the same brush, which shows a market that has begun to discriminate showing it has likely bottomed or is making a bottom.

Trading activity in August will likely continue to be in-line with that of July’s activity, as it is part of the peak of the summer season and will include the second Eid holiday break of the year. While, there is no new source of liquidity in the market, and local speculators continue to dominate activity, foreign investors have been consistent net buyers over the last few of months in a marked contrast from the picture for most of the prior months as the chart below shows.

Index of net foreign activity on the Iraq Stock Exchange (ISX)

(Source: Iraq Stock Exchange (ISX), Asia Frontier Capital)

The extension of the June pull-back in July, continues to suggests the beginning of a consolidation phase, which would need a significant recovery in turnover before a recovery can become sustainable and for the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), to claw back some of the −70.5% decline from the peak in early 2014 to July’s 2019 closing levels.

Please click here to download Ahmed Tabaqchali’s full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

The market’s action in July was so quiet that it turned activities like watching paint dry into spectator sports, as the start of the peak summer and holiday season depressed trading volumes.

Nonetheless, the average daily turnover’s decline of −15% month-on-month did not erase the turnover gains made in the prior two months, small as they were.

For the month, the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), was down −4.40% and down −3.97% for the year.

Please click here to download Ahmed Tabaqchali’s full report.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ experience in US and MENA markets. He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.