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 consolidated its recent gains with both prices and turnover declining from those of the prior month. Average daily turnover declined by about 15% from that of the prior month with the second half of the month seeing even bigger declines in daily turnover (see chart below). The decline in turnover was paced by declines in the overall market with the RSISUSD Index down -2.6% for the month and up 16.9% YTD.

Daily Turnover Index on the ISX (green line) vs its moving average (red line)

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

Foreign buying declined significantly from the strong pace of the prior month but remained consistent and at relatively high-levels in contrast to the on-off buying patterns of last year. Foreign selling dropped to the lowest level over the last 12 months (see chart below) which taken with the continued buying, implies that the Iraqi equity market is still in the early phases of foreign inflows.

Index of foreign buying (green) & selling (red) on the ISX

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

The increasing signs of the improvement in liquidity, discussed in recent newsletters, continued through the improvement in the market rates of the IQD vs. the USD.  Given, the dollarization of the economy, it follows that the strength or weakness of the IQD is a function of demand-supply balance for IQD and not a specific USD weakness or strength.  During the month the market price of the IQD vs the USD improved by about +1%, lowering the premium over the official exchange rate to its lowest point in a number of years to 2.1% from just under 6% at the end of 2017 (see chart below)

Iraqi Dinar (IQD) exchange rate vs the USD Jan 2014 – Mar 2018

(Source: Central Bank of Iraq, Iraqi currency exchange houses, Asia Frontier Capital)

(Note: The Spike in 2015 was due to a CBI policy that restricted the sale of USD, but was abandoned alter after causing a rise in parallel rates)

A great deal of this recovery is related to the recovery in oil prices and thus government finances that began in November 2016 as evidenced by the gradual decline of the premium over the official exchange rate from 10% in November 2016. The first visible beneficiaries were the country’s foreign reserves held with the Central Bank of Iraq (CBI), which increased to over USD 50bn by March vs USD 45.2bn at end of 2016, and the IMF’s estimates of USD 41.5bn by end of 2017. This was driven by less need for indirect monetary operations by the CBI to finance the budget deficit given improved government finances.

The improved finances were manifested through the flexibility gained by the changed dynamics of oil prices, which over the course of the last 12 months had a sustainable positive effect on these finances as Iraqi oil prices averaged about USD 49/bbl throughout 2017 vs. 2017 budget assumptions of USD 42/bbl, and YTD averaged about USD 61/bbl vs 2018 budget assumptions of USD 48/bbl. This was first expressed through a smaller budget deficit and thus less of a need for indirect monetary operations by the CBI and less borrowings, which should lead to greater flexibility for the government to allocate more resources to reconstruction and capital spending.

Given the centrality of government expenditures to the economy and the declining cost of the ISIS war, the improved finances should be reflected by a return of liquidity to the economy, but, this is yet to happen. Historically the observed time lag between Y-Y changes in oil revenues and Y-Y changes in M2 has been about 7-9 months which suggests that M2 growth should see improvement over the next few months as the chart below implies: it shifts the Y-Y percentage change in M2 back by 9 months versus the Y-Y percentage change in oil revenues. However, this is complicated by the uncertainties and government paralysis ahead of the parliamentary elections on May 12th which will likely delay this recovery.

Oil Revenues (green) vs the RSISUSD Index (red)

(Source: ISX Central bank of Iraq, Iraq’s Ministry of Oil, AFC.)

(Note: M2 as of Dec. with AFC est.’s for Jan & Feb., Oil revenues as of Feb. with AFC est.’s for Mar.)

The increased liquidity in the form of both local and foreign inflows reported over the last few months needs to be maintained for the market’s consolidation to lead to further recovery, and for this recovery to be sustainable. The backdrop continues to be positive as the sustained improvements in government finances should ultimately lead to better market action: historically the equity market, as measured by the RSISUSD Index, has tended to follow the improvement in government oil revenues with a time lag of 3-6 months as the chart below shows.

Iraq’s Oil Revenues (green) vs the RSISUSD Index (red)

(Source: Iraq’s Ministry of Oil, Rabee Securities, Iraq Stock Exchange, Asia Frontier Capital)
(Oil revenues are as of Feb with estimates by AFC for Mar)

Given the time lag involved and the election uncertainties, this will likely unfold over the next few months and the recovery will likely be in fits and starts with plenty of zig-zags along the way. This continues to underscore the opportunity to acquire attractive assets that have yet to discount a sustainable economic recovery.

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). 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 (pictured), 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 positive momentum which started during the second half of January continued unabated throughout February with both prices and turnover increasing meaningfully. The market, as measured by the RSISUSD Index ended the month up +18.5% and +20.1% YTD.

The average daily turnover reached the same levels last seen in early 2016 that were marked then by two significant events: the first being the sale of HSBC’s 8.8% holding in Dar Es Salaam Bank, while the second was the liquidation of a sizeable foreign Iraq fund for a total amount of around USD 20m. The two events combined with the then collapsing oil price had a devastating impact on the market in which heavy selling sent the average daily turnover higher and prices lower (see chart below).

Average daily Turnover Index on the ISX (green line) vs RSISUSD Index (red line)

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

Foreign investors, in an almost mirror image reversal, have been net buyers to a much larger degree than in prior upturns since the May 2016 bottom. However, the increase in foreign buying as a percentage of total buying has been less than that of the increase in absolute foreign buying, indicating that while foreign buying might have been a catalyst it was local buying that drove total buying. Foreign selling, both in absolute levels and as a percentage of total selling has been in-line with those of the last few months. The chart below shows these and the mirror image symmetry of the current market vs. that which prevailed in early 2016, yet it suggests that the current phase is in its early stages and that an increase in liquidity would need to be maintained for the rally to be sustained.

Index of foreign buying (green) & selling (red) on the ISX

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

Early, but narrow market leadership by high-quality names such as mobile operator Asiacell (TASC) and Pepsi bottler Baghdad Soft Drinks (IBSD) that started the recovery in December has expanded in February to include high quality names in the banking sector. The foreign buying interest that was focused then in these two names has also expanded to include the same higher quality banking names.

Fundamentals continued to be what fuelled the buying interest as discussed in January’s article. In the case of the banks the fundamental change has been a bottoming of the negative developments that prevailed over the last three years, i.e. declining/negative deposit growth, declining/negative loan growth and increasing NPL’s (non-performing loans). Their outlook is brightening as the expansionary effects from the reversal of escalating costs of conflict and collapsing oil prices that crushed the economy in 2014 provides the banks room to recover further and grow. The banks’ own confidence in their outlook was discussed in July’s article when high-quality banks declared dividend yields of up to 11%, while valuations were attractive with these banks’ market capitalizations trading at under 20% of their assets, which themselves were over 70% in cash and cash-equivalents.

The fundamental reasons for market leadership is the main characteristic that differentiates the current rally from that of October 2016-February 2017, in which the then leadership was concentrated in names that were extremely leveraged to the economic recovery post-conflict. Then, sharp rallies in lower priced and lower quality but high beta stocks drove the market’s gain as reported in AFC’s October 2016 newsletter. It was argued then that, “this should dissipate as high-quality stocks resume market leadership as part of the market bottoming and eventual recovery process”. While this seems to be the case now, it is still very early in the recovery process and remains to be seen if this recovery will extend and broaden out over the next few months.

The natural question is whether this rally is sustainable, i.e. whether the market will stabilize or move sideways before resuming its uptrend or even decline. Part of the clue may come from the MSCI Emerging Market and the MSCI Frontier Market indices, which Iraq’s outlook for 2018 argued were leading the RSISUSD Index by about 6 months. If this observation and the correlation were a guide, then the RSISUSD index should consolidate before resuming its rally. While this argument has merit, it should be noted that the fund inflows to the MSCI Emerging Markets & MSCI Frontier Market indices’ underlying markets are different from those for Iraq and driven by factors specific to the underlying markets’ own fundamentals.

MSCI EM Index, MSCI FM Index & RSISUSD Index

(Source: Bloomberg)

The increased liquidity in the form of both local and foreign inflows needs to be maintained for the market’s recovery to be sustainable. Given the time lag involved, this will likely unfold over the next few months and the recovery will likely be in fits and starts with plenty of zig-zags along the way. This underscores the opportunity to acquire attractive assets that have yet to discount a sustainable economic recovery.

The outcome of the Kuwait conference for the reconstruction of Iraq, in the form of loans/investments for the initial stages of the reconstruction drive, will likely add fuel to the expansionary effects from the reversal of escalating costs of conflict and collapsing oil prices that crushed the economy in 2014. The coverage of the conference was confusing at best and which this article by the author, “It’s not the donations, stupid”, discusses and puts into a clearer perspective.

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). 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 (pictured), 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.

‘It’s Not the Donations, Stupid’: Key Points from the Kuwait Conference

With a few exceptions, the coverage of the “Kuwait International Conference for the Reconstruction of Iraq” has been confusing at best, ranging from those who thought it was a failure for raising far less than needed to those who thought that that it was a reasonable success for raising a third of what was needed.

These thoughts were not helped by an Iraqi delegation that was focused on presenting a shopping list of projects that would need $88bn in financing. In the end, it was reported that Iraq received pledges of $30bn in loans and guarantees, just over a third of the required total.

Lost in all of this is the significant document “Reconstruction & Development Framework” that the World Bank Group (WBG) prepared with the Iraqi Ministry of Planning (MoP), as well as the IMF’s work on Iraq and its presentation at the conference.

The first is a comprehensive analysis of the reconstruction requirements across all sectors of the country and provides plans for short-, medium- and long-term reconstruction needs within the framework of a long-term recovery for the country. In combination with the second, they provide the structure for funding the reconstruction effort.

The key takeaway is that the Government of Iraq (GoI) is realistic in its expectations that external sources of financings will be small, and therefore it expects to utilize its own resources over the next five years for the required reconstruction.

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). 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 (pictured), 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 in January was a tale of two halves. The first half started with a whimper with turnover declining 40% from December’s levels and prices drifting lower taking the market, as measured by the RSISUS Index, to a decline of over -4% by around mid-month.

The second half was almost the opposite with prices recovering steadily and turnover doubling from the that of the first half. The market ended the month +4.8%.

However, the average daily turnover for the full month was anaemic at 90% of the average of that of the last 12 months, itself a low figure to start with.

Which argues that the recovery is in the early tentative stages, but supports the case that the correction that began in March of last year has run its course by October, and that the market could play catch up as discussed in the outlook for 2018.

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). 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 (pictured), 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 continued to build on the November recovery, up +3.0% for the month, with locals picking up the buying interest from foreigners, whose recovery in buying activity in November was mostly a re-investment of dividends and partly fresh inflow.

For the first time in a number of years, the new year outlook for Iraq is brighter with improving fundamentals after a number of extremely difficult years.

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.

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 (pictured), 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 dog days of the summer extended from October into the first 10 days of November, as the 40 day Arba’een pilgrimage came to an end, with continued declines in turnover and prices.

This pattern was sharply reversed as buying interest drove prices and turnover significantly higher. The market, as measured by the RSISUSD Index, was up almost +10% by mid-month, with daily turnover almost doubling on the up days as the chart below shows, before settling in at +4.3% as the buying activity subsided.

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

Mr Tabaqchali 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.

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. Originally published by Iraq in Context; re-published by Iraq Business News with permission. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Between February 2017 and mid-October, Rosneft signed a number of deals with the Kurdish Regional Government (KRG) that established for it, and by extension for Russia, a major position as both an investor and stakeholder in the Kurdish Region of Iraq (KRI)’s hydrocarbon resources and infrastructure.

The move was interpreted, especially by the KRG, as implicit support for the KRG in its bid for independence, especially in light of the latest deal signed following the reassertion of Iraq’s federal control over Kirkuk and other disputed territories. While there is an element of truth to this thinking, the deals are part of a wider geopolitical positioning for Russia as a major gas supplier to Europe and as an emerging power in the Middle East.

The deals provide Rosneft, and by extension Russia, effective control of the KRG’s Oil & Gas infrastructure, and a controlling stake in the region’s finances in more ways than one.

Within the oil space it has established this in three ways. The first was by providing USD 1.5bn in financing via forward oil sales payable over 3-5 years. This would be payable in kind from the KRG’s exports, until recently at about 550,000-600,000 barrels per day (bbl/d). However, the loss of the Kirkuk fields takes away about 430,000 bbl/d of production or eventually about half of the KRG’s exports.

This leaves the KRG with a tiny revenue stream after payments to International Oil Companies (IOC)’s, from which to make payments on forward oil sales of up USD 3.5 bn including Rosneft’s USD 1.5bn. A complicating factor is the repayment of other KRG debt, estimated at over USD 21bn by end of 2017, which will have to be factored into debt payment sustainability.

By Ahmed Tabaqchali (pictured), 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.

October was mostly a replay of the dog days of the summer as far as the market was concerned.

However, two developments are worth noting:

  • the changed dynamics of oil prices with significant implications for local liquidity; and,
  • emerging details of the Saudi led refinancing of the reconstruction of liberated territories.

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

Mr Tabaqchali 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.

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.

Ahead of the Basra Oil, Gas & Infrastructure Conference taking place on the 30-31 October in Beirut, we caught up with one of the speakers, Ahmed Tabaqchali the CIO of AFC Iraq Fund on the importance of Iraq, the economy and what to look forward to at the event.

Q. Why Iraq is such an important market in the Middle East?

A. The size and quality of Iraq’s hydrocarbon wealth would alone make the country one of the most significant markets in the region. As a consequence of over 35 years of conflict, much of Iraq has not seen any meaningful exploration and thus the potential for significant discoveries is exciting. The rebuilding of its hydrocarbon industry since 2003 has a long way to go, and as such there are enormous opportunities for upgrading the sector across the whole spectrum.

Q. What are the positive implications for the economy and for Basra for the new era of reconstructing Iraq?

A. The reconstruction process will have far reaching implications for the overall economy and Basra in particular with the potential that the associated economic activities to contribute to the development of a diversified economy. The short term effect impact on the economy would be to add fuel to the expansionary economic effects produced by the reversal of the negative forces, i.e. escalating costs of war & collapsing oil prices, that crushed the economy over the last 3 years.

Q. While the Iraqi economy is driven by the state, how do you assess Basra province role as Iraq’s economic capital in driving multiple industries?

A. Arguably, the state’s domination of the economy has stifled the development of both the private sector and regional development in the country. Basra can and should play a leading role in reigniting economic growth given its position as the economic powerhouse of the country. Its rich history & traditions coupled with its mineral & human wealth are significant assets that would allow it to assume this leading role.

Q. How do you at Asia Frontier Capital assess Basra’s role?

A. Personally, Basra has a special place in my heart as it is the burial site of my grandmother since the 1940’s when my grandfather was the governor of Basra, and so I have a bias for the province and its people. It’s worth repeating that its  rich history & traditions coupled with its mineral & human wealth give it an outsized role in Iraq’s future.

Q. What is the role of AFC in Iraq in enhancing projects performance and driving growth?

A. The AFC Iraq Fund, as an investor in Iraq’s equity market signifies AFC’s belief in the long-term economic potential of the country. As long-term institutional investors, we bring foreign capital into the country and contribute to the development of the country’s institutional investor sector, which like much of its frontier market peers is underdeveloped. The long-term horizon of Institutional investors allows them to invest counter cyclically especially during financial crisis by acting as shock absorbers which in the process provides the underlying companies with shareholder stability that allows them to rebuild, grow and expand.

Q. What is your main interest at the Conference? And what are you going to discuss at the Basra Oil, Gas & Infrastructure 2017 Conference in Beirut 30-31st of October?

A. The conference provides an opportunity to meet the players and participants in potentially one of the most dynamic drivers of Iraq’s economy through Basra’s industries spanning oil, gas, power, petrochemicals, infrastructure, construction, transport and logistics. I am hoping to discuss the role and challenges of the private sector in the reconstruction process. Specifically, to explore the role that institutional investors can play as shareholders in infrastructure projects both as an additional source of financing and as contributors to long-term stability as anchor investors.

(Source: CWC)

By Ahmed Tabaqchali (pictured), 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.

In spite of the intense international focus, the Kurdish referendum was almost a non-event for the market during the month. Thoughts on the referendum’s implications will follow after the market review.

The month was compressed to just over two weeks of trading due to the Eid and Islamic New Year holidays, while the last 10 days were marked by the start of the month of Muharram, one of the four sacred months of the year.

In Iraq, it has an oversized role as the 10th day of the month known as Ashura, occurring October 1st, marks the start of the 40-day annual Arba’een pilgrimage.

It is estimated that over 20 million Shia pilgrims will visit Karbala to commemorate the martyrdom of Iman Hussein, which was a bifurcation point in the Shia-Sunni divide.

The equity market, as measured by the RSISUSD index, ended the month down -1.9%, as the month was further compressed with average daily turnover down to 3 year lows. Most of the losses took place in the last 2-3 days of the month as buyers disappeared and prices were marked down.

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

Mr Tabaqchali 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.

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.