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: “Revisiting the Iraq Thesis, Five Years Later”

June marked the five-year anniversary of the AFC Iraq Fund – conceived a year earlier amidst the perfect storm of ISIS’s take-over of the city of Mosul, it threatening Iraq’s break-up, and the crash in oil prices.

The thesis behind the launch was that the common threat of ISIS, and its ideology, would lead to a realignment of interests of regional and international players who would ultimately work together to confront it and end or contain the proxy wars that contributed to the spread of extremism.

The end of conflict, and the expected oil price recovery, would ultimately lead to an economic revival whose sustainability would be anchored by a multi-year reconstruction spending to repair the damage of over four decades of conflict that is orders of magnitude worse than that faced by any country in conflict in recent memory.

The five-year anniversary mark sees Iraq grappling with ingredients of yet another perfect storm: the disruptions to its economy in COVID-19’s wake; a potential second wave of the pandemic that the weak healthcare infrastructure is ill-equipped to handle; and topped off by potential political instability as the new government pursues an economic reform program that simultaneously threatens the interests of the political elite and delivers austerity to an alienated population.

Iraq’s equity market has arguably discounted these negatives and several others as it has been shredded by a brutal multi-year bear market in which the YTD decline of 14.6% comes on the back of declines of 1.3% in 2019, 15.0% in 2018, 11.8% in 2017, 17.3% in 2016, 22.7% in 2015, and 25.4% in 2014. The extent of this discounting makes its risk-reward profile very attractive versus almost all other equity markets that are still mostly discounting the same economic scenarios pre-COVID-19, even though the world has fundamentally changed since then.

In-spite of the varying extents of recoveries from the March lows, the gap between other equity markets and Iraq’s equity market is still huge, supporting Iraq’s relative attractiveness (chart below).

Normalized five-returns for the RSISUSD Index vs MSCI World Index, MSCI Emerging Markets Index and MSCI Frontier Markets Index

(Source: Bloomberg, data as of July 6th)

Events that unfolded over the years confirmed the basic tenets of the investment thesis, and even though the severity of the economic downturn was much worse than expected, the equity market showed signs of bottoming following the multi-year bear market as 2019 came to end. 2019 saw both the market broadening its breadth, and a tentative economic recovery at both the macro and company levels.

It can be argued that these encouraging developments were put on hold by the dramatic events of early 2020, i.e. the US assassination of Iran’s top general in Baghdad and the subsequent Iranian rocket attacks on Iraqi military bases, as well as the onset of COVID-19. However, the real risks to the investment thesis were, paradoxically, the effects of increasing oil revenues on the last Iraqi government’s myopic spending patterns.

This government, formed following the 2018 general elections and encouraged by increasing oil revenues in 2018 and 2019, reversed the first structural reforms that came with the Stand-By Arrangement (SBA) reached with the IMF in 2016, and reverted to the same failed policies of prior administrations. The explanation lies in the rentier structure of the Iraqi state, in which the public sector dominates the economy through the state’s direct and indirect control of the largest economic activities, and its role as the largest formal employer.

Higher oil prices, in the past, incentivized successive governments to buy loyalty through immediate distribution of oil rents through expanding the public sector payroll at the expense of much more rewarding, but long-term, returns from investments in infrastructure (chart below).

(Source: IMF Iraq Country Reports 2004-2019, Ministry of Finance, Asia Frontier Capital. Lines in lighter colour are trendlines)

This playbook was evidenced in the 2019 expansionary budget, in which spending on salaries and pensions increased by 13% year-over-year and accounted for 47% of total expenditures, while non-oil investment spending increased a seemingly impressive 64% year-over-year, yet it accounted for 5% of total expenditures. The initial budgeted non-oil investment amount would have been equivalent to an 8.5% stimulus to the non-oil economy, which would have provided sustainability to the consumer spending led economic expansion underway (the “AFC Iraq Travel” report, in August, reviewed the revival of commercial life in Baghdad).

However, as 2019 wore on it was clear that the government was not executing on most of its investment spending program, and was planning to use the growing budget surplus instead to embark on a significant increase in the public sector payroll. The economic upshot would have been an acceleration of consumer spending, which while positive for equity returns, would have been short-lived, peaking in 2022 or so as the inevitable bust would have set-in by then.

The known nature of COVID-19 and the emerging, slow and un-synchronized recovery from the global lockdown, continuous to argue for oil prices, to average in the range of $30-40 per barrel for Brent crude for 2020, $45-55 per barrel for 2021. This means that Iraq cannot avoid embarking on real economic reforms. This is exactly what the new government, formed in May, is pursuing and as articulated by the Minister of Finance, these reforms include a fundamental retooling of the budget’s structural imbalances.

The dilemma for the government is that on the one hand, the basic governing equations of Iraq’s political system – which largely allowed the political elite to maintain their oversized influence on economic policies – are still in force, and as such the elite will likely derail real reforms that threaten their interests; while on the other hand the rolling economic crisis means that alternative proposed stop-gap measures will not work for long and so reforms are unavoidable in the end.

A way out is in pursuing reforms that will yield real economic dividends, yet at the same will not threaten the elite’s interests. The first of these are the low hanging fruit, ignored during the years of oil aplenty, of measures that will allow the private sector to grow, supported by an unconstrained commercial banking sector and unhindered by government bureaucracy.

One of the first measures of the reform initiative supports this line of thinking in that the Central Bank of Iraq (CBI) introduced regulations that would allow commercial banks to provide letters of credit for government entities – a step that could lead to the erosion of the monopoly of the state banks, that in 2018 accounted for 81% and 86% of banking loans and deposits respectively, and which are mostly with the government.

In the short term, these measures would provide qualified banks with fee income to boost their earnings, eventually grow their deposit base as they develop their government businesses, in the process attract more private sector deposits, which ultimately would support their lending activities. More such low key, yet implementable measures are likely to be introduced over the next few months. Coupled with these would likely be measures that would remove some of the stifling regulations that hinder the private sector.

While such measures will not attract many headlines, and each on its own might not seem to be significant, their cumulative effects would be extremely positive for the banking sector. The first to feel these effects would be the earnings and book values of the ISX’s listed banking sector, which given that the sector was one of the worst effected in the multi-year brutal bear market, these in turn would have outsized effects on the sector’s equity returns. Consequently, these would in turn impact the whole market positively given the sector’s major weighting in the market’s trading activity.

June was a low-key month as the re-imposed two-week curfew on May 31st to contain the latest increase in COVID-19 cases meant that the Iraq Stock Exchange (ISX) resumed trading on June 14th, following its last trading day on May 21st – which preceded the Eid-break. The ISX returned to its five-day a-week trading schedule, but the government’s newly imposed rolling curfews on Thursday-Saturday as part of its COVID-19 containment efforts meant that the five-day working week has been cut down by one day, to Sunday-Wednesday.

Nevertheless, that still means a 33% increase in trading activity, and although turnover was still low, the ISX continued its recovery from the April lows, up 5.1% for the month.

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.

New report from FAO, IFAD, WFP and the World Bank reveals complex impact of COVID-19 on food security in Iraq

As the COVID-19 pandemic continues to evolve, the Food and Agriculture Organization (FAO), International Fund for Agricultural Development (IFAD), World Food Programme (WFP) and the World Bank have collected and analyzed new data on the impact of the crisis on food security, and made corresponding joint recommendations in the first report of a new regular series, “The Impact of COVID-19 on Food Security in Iraq.”

Many people have been unable to work during the current crisis. Around 4.8 million people (12% of the total population) are using negative coping strategies to meet their food needs, and a large stimulus package will be required to re-start the economy, beyond the current measures to mitigate the impact on households and businesses.

On the other hand, food availability has been stable overall, with above-average cereal production in the 2019/2020 season, and the government of Iraq taking a proactive role to keep the food system open despite lockdowns. Food imports have continued, with global trade largely uninterrupted.

Humanitarian, social protection and development responses have stepped up, both from the government (such as “Minha” – “Grant”) and supporting partners. However, global trends have had a cascading impact on Iraq. The fall in oil prices and the slow recovery of the global oil market have had negative implications for the domestic budget, and may affect the government’s ability to continue to fund social protection programmes and agriculture subsidies.

With assistance from Food Security Cluster partners and the Cash Consortium of Iraq, FAO, IFAD, WFP and the World Bank analyzed food availability and access, with a particular focus on vulnerable populations, and jointly made policy recommendations.

“With initiatives to work towards a regional trade integration framework, create an enabling environment for increasing domestic production, invest in productive infrastructure, enhance social protection and monitor food security, vulnerable households can continue to have access to nutritious food. All possible efforts will be made to support the government of Iraq and implement the proposed recommendations,” said FAO Representative in Iraq Dr Salah El Hajj Hassan, IFAD Representative for Iraq Tarek Ahmed, WFP Iraq Representative Abdirahman Meygag, and World Bank Iraq Representative Ramzi Neman, in a joint statement.

The new publication builds on the partners’ weekly reports on COVID-19 and food security, which launched in April and continue to be released.

Download a copy of the new report at:

(Source: UN)

By John Lee.

GE Gas Power has reported that it has successfully completed services on four 9F.03 gas turbines, two steam turbines and six generators at Iraq’s Besmaya Power Plant safely and on time, while continuing to execute wider operations and maintenance (O&M) works at the site despite the many challenges posed by the COVID-19 pandemic.

These service activities reduced the risk of unplanned downtime of power generation equipment at the site, enabling the plant to reliably supply up to 3 gigawatts (GW) of electricity to the national grid to help meet the peak summer demand for power.

Owned by Mass Group Holding (MGH), Besmaya is Iraq’s largest power plant. Phases 1 and 2 of the project can generate up to 3 GW and Phase 3, which is currently under construction, is expected to add up to another 1.5 GW. The facility is the first one in the country outside the Kurdistan region to be developed by an independent power producer on a build-own-operate basis for the Iraqi Ministry of Electricity.

GE has supplied eight gas turbines, four steam turbines and 12 generators that are covered by a 20-year service agreement and is also responsible for O&M services for Phases 1 and 2 of the project to ensure smooth operations at the site. Additionally, GE won a contract to supply four 9F.04 gas turbines and four generators for Phase 3. Much of the electricity generated at Besmaya is fed to the capital Baghdad and surrounding areas and its uninterrupted operations are critical to power local healthcare facilities, homes, businesses and more.

Ahmad Ismail, Chairman of MGH, said:

At MGH, we are committed to strengthening Iraq’s power sector further.

“The logistical and mobility constraints resulting from the COVID-19 outbreak led to several unexpected difficulties in carrying out the required service works at Besmaya including delays in the arrivals of parts and challenges in access to technical experts.

“However, the determination, flexibility and efficiency GE displayed by being able to draw on local teams on the ground, remote support from experts and access to a global supply chain, enabled us to keep the plant operational with high levels of reliability and efficiency and to deliver on our commitments.

Beginning February 2020, over 110 GE and FieldCore (a GE-owned field services execution company) staff members liaised closely with MGH to execute the services safely and as per schedule. The works conducted included the first phase of Hot Gas Path inspection services of the gas turbines, steam turbine minor inspections and generator MAGIC (Miniature Air Gap Inspection Crawler) inspections.

Experts based in the Middle East and Europe liaised with the local site team through digital tools, video conferences and phone calls on a daily basis to remotely support mechanical and commissioning works, identify and transport stocks of parts that needed to be replaced and keep track of overall project progress. To reduce the risk of exposure to COVID-19, additional hygiene, health and safety measures were implemented at the site, including more frequent disinfection and cleaning activities, thermal screenings of everyone entering the site, distribution of additional mandatory personal protective equipment such as gloves and masks, COVID-19 prevention training sessions, accommodation for staff on-site, as well as other precautions.

Joseph Anis, President and CEO of GE Gas Power, Middle East, North Africa and South Asia said:

As we work through these exceptional times, our resolve to support the Ministry of Electricity and people of Iraq by providing the electricity needed to power everyday life, growth and progress remains unchanged. Our top priority remains the safety of our people, while continuing to deliver results for our customers and the communities we serve.

“I would like to thank the supportive staff at GE and MGH who stayed away from their loved ones for months, working long hours to secure reliable power supplies during this unprecedented period and for the hot summer months ahead. Together, we are honored to make a positive difference to the lives of millions of Iraqi citizens.

GE and FieldCore have up to 300 people across Iraq. The company has supported the development of the country’s energy infrastructure for over 50 years and since 2011, helped to bring up to 15 GW of power online across Iraq, including up to 1.4 GW in conflict affected areas such as Diyala and Mosul.

The company has also helped bring over US$2.4 billion in financing for energy sector projects in Iraq in collaboration with export credit agencies, commercial banks and other organizations.

(Source: GE)

By Safa Fadhil, Head of Exploration and Sundus Abass, Gender Advisor at UNDP Iraq. Any opinions expressed are those of the author(s), and do not necessarily reflect the views of Iraq Business News.

This year marks the 20th anniversary of the UN Security Council (UNSCR) Resolution 1325, which helps to ensure women are on the frontlines of achieving stability and peace in Iraq.

With this in mind, UNDP Iraq’s ¬†Accelerator Lab and Gender Division partnered with French Embassy in Iraq, Ambassade de France en Irak, The Station for entrepreneurship, Agence Universitaire de la Francophonie , Zain Iraq Telecommunications Company, and Ashur Private Bank on a competition to support Iraqi women entrepreneurs.

The Raa’idat Competition encourages women to develop and grow their own enterprises. Despite the financial stress and anxiety resulting from the outbreak of Coronavirus in Iraq, the initiative captured the enthusiasm of Iraqi women keen to expand their business know-how.

To start, leaders from 20 entrepreneurial projects participated in training courses related to business planning and management, and other relevant topics prescribed by telecommunications company Zain Iraq. Seventeen projects progressed to the next stage of the competition, with leaders participating in financial budgeting training undertaken by UNDP Iraq’s Accelerator Lab.

The competition is ongoing – from these seventeen, five finalists will be selected, and then one overall winner, who will receive $ 10,000 in the form of a six-month incubation period, consultant support, recruitment costs, and purchasing specific equipment for its development. Cash prizes will also be awarded.

UNDP Iraq’s training offered participants a holistic approach to women’s economic empowerment, defining it as ‘a process whereby women’s and girls’ lives are transformed from a situation where they have limited power and access to economic assets, to a situation where they experience economic advancement’. In addition, it underlined the factors that enable and constrain women’s economic empowerment, while using the Design Thinking and Behavioral Insight methodologies to guide the work.

UNDP Iraq provided expertise to highlight the importance of women’s economic empowerment and financial budgeting techniques to enable women entrepreneurs to effectively compete in the market. The training was conducted virtually and used a combination of interactive methods to deliver the target. The Accelerator Lab in Iraq used a human-centered approach to structure the training material, commencing with a needs-assessment session before planning the three lectures that followed.

The competition was integral to amplifying women’s voices. “I want to prove myself; I do exist, and I have the right to participate in my country’s economic empowerment,” says participant Nadia. For UNDP, this sentiment sits at the heart of the organization’s work.

it also enhanced the Accelerator Lab’s mandate in fostering collaborations with local and international partners to solve the issues of tunnel-vision employment experienced in Iraq, – i.e, pressures placed on young people to attain certain jobs. The competition also led to the discovery of 17 new, local, under-the-radar solutions and opened the door to experimenting with them.

To ensure the sustainability of the project, The Accelerator Lab in Iraq will be part of the training and competition evaluation that will take place after COVID-19. This will ensure the empowerment of women is prioritized alongside sensing and exploring innovative local solutions.

(Source: UNDP)

Advertising Feature

Rabee Securities Iraq Stock Exchange (ISX) market report (week ending: 25th June 2020).

Please click here to view a table of listed companies and their associated ticker codes.

The RSISX index ended the week at IQD581 (-2.0%) / $603 (+3.1%) (weekly change) (-11.9% and -14.0% YTD change, respectively). The number of week traded shares was 2.4 bn and the weekly trading volume was IQD2.3 bn ($1.8 mn).

Note: According to the Public Health Committee’s decision to maintain curfew days on Thursdays, Fridays and Saturdays, trading on the ISX will be from Sundays to Wednesdays until a further announcement.


ISX Company Announcements

  • ISX will suspend trading of Asiacell (TASC) starting Jul. 8, 2020 due to the AGM that will be held on Jul. 12, 2020 to discuss and approve 2019 annual financial statements.
  • Iraqi for Seed Production (AISP) will hold a GA on Jul. 5, 2020 to elect 4 original and 4 alternative board members from the private sector. The company has been suspended from trading since Nov. 12, 2019 due to not disclosing its 2019 financial statements.
  • Trust International Islamic Bank (BTRU) will resume trading on Jun. 28, 2020 after discussing and approving 2019 annual financial statements.
  • In order to support the economy of the country by developing agriculture and supporting Iraqi farms and creating an agricultural renaissance, and in order to support and employ young people to eliminate unemployment, and to achieve sustainable development through cooperation between the private banking sector and the public sector, and to achieve government goals by benefiting from local funds and promoting the local product, the International Islamic Bank (BINT) contracted with the Ministry of Industry and Minerals / Electronic Industries Company to finance water pumps operating by the solar energy system type Lorentz German according to Islamic contracts (Murabaha contract) within the CBI’s IQD1 trln initiative, where farmers will be financed with amounts that could reach IQD1.0 bn.