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 Elections, the Economy and the Stock Market

A key aspect of the Iraq investment opportunity is arbitraging the delta between real and perceived risk. The perceptions of the widely covered parliamentary elections fit within this arbitrage opportunity in that they miss the mark by a wide margin.

The May elections did not result in an overall winner with an outright majority (165 seats among the parliament’s 329 seats) enabling the formation of a government. Instead, they produced winners and losers who will eventually form a coalition government. At the lead is Sairoon, a coalition of Shia cleric Muqtada Al Sadr, Communists and Liberals, with 54 seats; followed by Fateh, a coalition of the political arms of the Popular Mobilisation Units (PMU’s), with 48 seats; finally, Nasr, the Prime Minister’s (PM) coalition, with 42 seats.

The rest are made up of: five different coalitions each with 18-25 seats; four coalitions each with 4-6 seats; and finally, a gaggle each with 1-3 seats. The next step would be the formation of an alliance of coalitions that would, on the first day of the new parliament by end of June, have the largest number of seats to enable it to have a PM with a chance of forming a government. The whole process should take a few weeks but, in the past, it took a few months.

The winning coalitions, irrespective of their lead player, are all cross-sectarian unlike the prior ethno-sectarian monolithic blocs that dominated over the past 14 years – a division that was the root cause of Iraq’s political and social instability since 2003. Moreover, for the first time since 2003 there was a strong mass opposition to these ethno-sectarian monolithic blocs that manifested

in an active non-participation movement. This led to an election participation turnout of 44.5%, which in turn had huge effects on the seats won and lost by the different coalitions.

Drilling further into the leading blocks shows neither they nor their leading players conform to simplistic assumptions. For example, Muqtada Al Sadr is often described as a firebrand cleric who is anti-secular, anti-Western and pro-Iran as a result of his leading role in Iraq’s dark history since 2003. Yet, at least outwardly, he went through a transformation to a firebrand cleric who is anti-Iran and anti-its proxies in Iraq, whose alliance with Communists and Seculars kept the 2015 pro-reform demonstrations alive and relevant.

Moreover, he was a leading player in rebuilding Iraq’s relationship with Saudi Arabia and the UAE – both received him in their capitals in 2017 to further this rebuilding. The second leading coalition, Fateh, a grouping of the political arms of the supposedly pro-Iranian PMU’s, although not all are, is led by Iranian-allied Bader Organization. Yet Bader has been a part of every Iraqi government since 2005, responsible for the Ministry of the Interior, and as such a major part of the next phase of Western support for Iraq in rebuilding its security apparatus in the long-term fight against ISIS.

The most visible fruit of which has been the decline of violence since the end of the Mosul campaign and in the first violence free elections (see chart below). Finally, the Naser coalition which is led by the PM and while much admired for leading the fight against ISIS, he suffers from perceptions of failure to address the demands of the demonstrators since 2015. Although an unfair criticism given the overriding priority to deal with the ISIS invasion, it was behind much of the reason for his collation’s third place showing. Nonetheless, his chances of returning as a PM capable of leading a workable government are high.

UN Casualty figures for Iraq November 2012 – April 2018

(Source: United Nations Assistance Mission for Iraq (UNAMI), for 8 months from 2015 UNAMI, in some cases, could only partially verify certain incidents)

Optimists see the potential for a coalition governing with a clear reform agenda and with a proper opposition in parliament providing a check on the government. The pessimists however see a repeat of the prior coalition governments that were made up of all groupings in parliament, and thus no real change to the failures since 2003. However, irrespective of who would be right, a few things are clear that would have implications for Iraq’s economy, the investment opportunity in Iraq and the stock market.

The combination of the lead by Sadr’s coalition, the continued pro-reform demonstrations since 2015, and the large active non-participation movement together imply that the upcoming government would need to address the issues at the heart of the public’s anger. This would be the provision of services and reconstruction, which require much needed overdue investments in the country’s infrastructure and the reconstruction of the liberated areas.

The new oil price dynamics have a huge positive implication on Iraq’s ability to provide funds for this massive investment spending estimated at USD 88bn over the next five years. Current estimates for the country’s revenues for 2017-2022 are based on Iraqi oil price assumptions of USD 45.3/bbl in 2017 and increasing to USD 47.1/bbl by 2022. These estimates would result in a cumulative deficit of USD 17.6bn, thereby increasing the debt load, necessitating borrowing to fund the deficit and restrict the ability to fund reconstruction. This implies the need for outside aid and investment to fund reconstruction.

However, different assumptions based on the new oil price dynamics would provide a vastly different picture. For instance, using realized prices of Iraqi oil of USD 49.2/bbl for 2017, and assuming Iraqi oil prices of USD 60/bbl for 2018, then declining to USD 51/bbl in 2022, would produce a cumulative surplus of USD 47.4bn instead of the earlier assumed cumulative deficit of USD 17.6bn. In other words, this equals a turnaround of USD 65bn in potential available funds.

While, an assumption of an oil price of USD 64/bbl for 2018, then declining to USD 55/bbl by 2022 would produce a cumulative surplus of USD 78.2bn, or a turnaround of USD 95bn in in potential available funds.

Granted some of this windfall will result in higher government spending, especially on populist measures which would be detracting from the funds available for infrastructure investment. Though this would nevertheless be a large positive for consumer confidence and economic activity, all of which would ultimately support the earnings profile of consumer service providers and the banking sector.

In the immediate term, given the impossibility of forecasting future oil prices out to 2022, if Iraq’s oil price was to hold the YTD average for the remainder of 2018, it would convert the IMF 2018 projected deficit of USD 9.5bn into a surplus of USD 10.9bn. This means a turnaround of USD 20bn in potential available funds. Coupled with a slight positive variance to 2019 projections, this would provide Iraq with enough fiscal flexibility to start directly funding the immediate needs for reconstruction. This changed fiscal position would further allow it to comfortably access debt markets at reasonable rates to build upon this reconstruction. The potential addition of regional investments led by Saudi Arabia, as discussed here in the past, could lead to a self-reinforcing investment cycle.

The stock market’s action in the weeks before and after the elections has been business as usual and very much followed the same themes discussed over the last few months. This is an indication of how much negative news the market has discounted over the last three years that saw the index, as measured by the RSISUSD Index, decline -68% from its 2014 peak to the 2016 bottom.

Through 22nd May the market was down -3.9% for the month, bringing the year to date gains to +5.8%. The daily market action has been almost identical to that of the prior month with the same low turnover, the same buying in the selected leading stocks and the same selling in the banks based on the same fears.

The response of the currency to the elections for the most part matches that of the market with the market price of the Iraqi Dinar (IQD) weakening versus the USD in the days around the elections but returning to the same levels at the start of the month. The upshot, is that the premium of the market price of the IQD over the official exchange rate increased from 1.2% at the end of April, reaching 2% just before the elections and is now back to 1.2%.

The issue that continues to dominate the market is the timing of the return of liquidity as a result of the expansionary effects of higher oil prices and the end of conflict. As discussed here in the past, 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, it is complicated by the additional time taken up by pre and after elections, and the additional time needed for the formation of the new government. All of which will delay this recovery but would likely result in a large back-end loaded return of liquidity.

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

(Source: ISX Central bank of Iraq, Iraq’s Ministry of Oil, AFC.)
(Note: M2 as of Jan. with AFC est.’s for Feb & Mar, Oil revenues as of Mar with AFC estimates for Apr & May)

As argued here in the recent past, the backdrop continues to be positive: historically the equity market, as measured by the RSISUSD Index, has tended to follow 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, AFC)
(Oil revenues are as of Mar with estimates by AFC for Apr & May)

Given the time lag involved and the delay over the formation of the new government, this will probably 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.

_______________________

[1] Source of current estimates on Iraq (deficit, oil price, revenues etc) are from the IMF Iraq Country Report No. 17/251 (http://www.imf.org/~/media/Files/Publications/CR/2017/cr17251.ashx). Updated assumptions are the author’s calculations based on the above source

“Funding the government via borrowing money from the Central Bank of Libya reached 58 billion dinars and the spending of 2017 was over 32 billion …

In the document .. The Central Bank gives the company "Key Card" 24 hours to pay the salaries of employees and retirees
5/22/2018

In the document .. The Central Bank gives the company "Key Card" 24 hours to pay the salaries of employe
es and retirees



The Central Bank of Iraq gave the International Company for smart card "Key Card" 24 hours to pay the salaries of employees and retirees, while carrying the legal consequences in the event of failure to implement the resolution.

A document issued by the Central Bank of Iraq that the company gave the global card smart card "Key Card" 24 hours to pay the salaries of employees and retired retirees salaries in the bank and take the necessary regulatory action.

http://alghadeer.tv/news/detail/74809/

Possibility of spreading banking culture

5/22/2018

Mohammed Sharif Abu Maysam
The concept of banking culture is not only about raising banking awareness among the public, but also of banking awareness objectives that are intertwined in more than one detail with the goals of sustainable development that reach the stages of realizing the welfare state.

In other words, the goal of achieving a state with a minimum level of well-being can not be carried out without the presence of an audience that possesses the awareness of banking, which qualifies it to claim its banking rights, in addition to knowing its duties, which are indispensable in overcoming the bureaucratic and routine rings and their illegal products in banking transactions and transactions towards creating an environment.

The informal trading areas of the monetary bloc issued by the Central Bank are reduced.

On this basis, the axes of banking awareness and financial culture were given a high priority, not less than the priority of the introduction of technologies, which will contribute to the reduction of workshops slack in the production of banking service.

But the question here is the extent to which the possibility of achieving a banking awareness among the public contributes to the culture of saving and leave the stage of rupture with the banking sector caused by the accumulation of events and facts that contributed to the establishment of mistrust over more than three decades between a total economy

and an uncontrolled market economy created excruciating factors From the arena of banking to parallel markets and quarries quarrying, which calls us seriously to reflect the means of restoring confidence in conjunction with work on the axis of the introduction of electronic systems and the activation of payment tools and exchange
through them.

This has made the National Program for Financial Inclusion to combine banking awareness with the protection of the public in one axis.

It is no longer a matter of banking awareness without preparing answers to protect the public, which invites us to talk about the infrastructure within the human resources operating in the sector The banker in both government and private

As close to the field of work may be aware of the state of non-harmony inherited among employees in the government sector specifically with the public, and certainly recognizes the public view of these institutions as institutions of authority, so it may be strange to touch the public the possibility of dealing with the beautiful "to always be right customer "When you buy the service, as it would when you buy the item from any
special store .

Hence the need to intensify efforts on the so-called "internal customer" in the philosophy of quality assessment a reference to the workers in the establishment, and work on this element to create a link through which to promote the culture of banking and catapulted the mass of cash condensed into the arena of banking.

http://www.alsabaah.iq/ArticleShow.aspx?ID=157485

Damaged currency causes great suffering and embarrassment to citizens

5/21/2018

Some circles do not accept dealing with them
Baghdad / Huda al-Azzawi

The Iraqi citizen may be one of the few citizens in the world, who complain about not accepting the deal in the national currency torn or damaged by some departments or institutions or shops, which causes him many problems and verbal quarrels may reach sometimes to conflict with hands in full view of The concerned authorities that did not issue a clear and direct order obligates everyone to deal with the currency in any way.

Currency torn within salaries
Al-Sabah spoke with more than one official and a citizen in order to shed light on this problem.

"At the end of each month, we allocate more than (200) thousand dinars of the currency torn apart equally among the employees of our district," said a member of the committee to receive salaries in a state department.

The employee, who did not want to be named, said that «a lot of problems and verbal quarrels occur between us and the trustees of the Fund, who insist on handing over sums of money smuggled and affixed on both sides, beginning with the employee’s suffering in how to manage this currency rejected by most dealers, Cabs to shop owners ».

She cautioned the employee that all this is happening as a result of the absence of a number of measures and means that the Central Bank of Iraq to take to maintain the prestige of the currency and ease of circulation in the markets.

Currency exchange

As for the burning or buried currency, Hassan pointed out that it is submitted to the Central Bank exclusively to replace them according to certain controls, noting that the bank is working on its part to solve this problem through the processing of Rafidain Bank and Rashid new banknotes and small categories to pay within the salaries of employees,

He pointed out that t
he bank continues to print and improve the banknotes, especially small groups, and pump them to compensate for the damaged paper, while at the same time preserving the currency and accepting it whatever its status as a symbol representing Aadh country and inform the bank in the case of refusal of banks received the damaged currency of citizens.

The suffering of the working class
For his part, said the citizen Rafie Abdul Latif MP, that the working classes and poor are the most social groups are vulnerable to deal with damaged currencies, because this segment traded in many of them, in addition to the same currency to factors that lead to damage early, such as moisture and wet and other It is noteworthy that even the gas stations have refused to accept the torn paper currency,

Therefore, the government and the concerned parties should enact laws to protect the currency as is the case in a number of foreign countries that have issued legal provisions criminalizing those who refuse to deal with them if they are torn or
old.

Stamping of coins

On the re-minting of the coin for small groups and thus salvation from the problem of extinction of the currency currently in circulation, drew Professor of Economics, University of Nahrain Dr. Ngham Hussein Nima, that there were attempts in 2005-2006 to issue a coin of 250 dinars and 100 dinars and 50 dinars and 25

But the loss of the culture of trading in small metal groups among the public forced the Central Bank to stop circulation and convert it into scrap metal and sell it to a trader, so before taking any steps for the introduction of the coin must propagate the culture of trading in small metal categories

And this is certainly the responsibility of the Central Bank of Iraq through the dissemination of financial culture among all segments of the society and openness to the public to raise financial awareness among their ranks and to indicate the importance of dealing with metal groups And keep the currency

Measures to protect the currency
to that said economic researcher Hassan Jamg, said the currency ‘s strength will be in a positive state with the power of the state, the larger the strong and stable state and the economy in the active state, the same presence and effectiveness in the transactions of internal and external of this currency,

and no secret that most communities and nations take A number of measures and means to preserve this currency and to attempt to secure its material and moral status from any external influences that may be natural or by an effective act, such as the case of currency fraud or smuggling abroad,

it may be among the solutions to emphasize the need to respect National currency and dealing Regardless of their condition, and in the case that the currency is very tired or in poor condition, such as torn or semi-damaged, the obligation of government agencies to facilitate the taking or retrieval, and then delivery to banks or the competent banking authorities to destroy them and issue a new currency instead of that damaged.

http://www.alsabaah.iq/ArticleShow.aspx?ID=157412

Economic events awaiting the global markets

5/21/2018

During this week
Capitals / follow-up morning

The world markets are receiving a new week of important political and economic events amid central banks’ control of the scene. Several central bankers are also scheduled to speak on different occasions giving their views on monetary policy, as well as a number of central banks
Meetings.

Markets are also awaiting the presidential elections in Venezuela in conjunction with the economic problems experienced by the state.

The start of the week Many European markets are trading at the beginning of this week, with trades resuming on Tuesday.

Germany, France and Switzerland are among those markets celebrating Monday White Day. Central Bank Presidents The President of the Bank of England and the Chairman of the Federal Reserve are speaking on various occasions this week.

On Thursday, Bank of England President Mark Carney is due to speak at the Bank of England’s Markets Forum in London. On Friday, Carney and Jerome Powell are scheduled to take part in a panel discussion on the future of central banks at a Stockholm conference.

OPEC meeting

OPEC holds its monthly meeting on Monday, in the presence of the 13 member states along with 11 other oil-producing countries.

In OPEC’s regular meetings, developments in the oil market and levels of production and demand for crude are discussed. While the monthly report of the Organization of the increase in production in April by 12.1 thousand barrels per day to 31.930 million barrels per day.

European and the minutes of the Federal European Central Bank and the Federal Reserve announced the minutes of their last meeting over the weekend, which is often released after 3 weeks of the bank meeting.

On Wednesday, the Fed will announce its meeting at which it decided to set interest rates at 1.50 to 1.75 percent, a move that has been approved.

The European Central Bank is due to release minutes of its meeting on Thursday on interest rate stabilization, with interest rates on major refinancing and interest rates on lending and deposits at 0.00 percent, 0.25 percent and 0.40 percent respectively.

VENEZUELA, Venezuela – Venezuela held its presidential election on Sunday at a time of huge economic problems ranging from currency collapse to rising inflation, along with a lack of oil production.

http://www.alsabaah.iq/ArticleShow.aspx?ID=157393

The role of economic morning

5/20/2018

Dr.. In the name of Brahimi, the
press in Iraq continues to be an important factor in the formation of collective opinion in all areas despite the entry of social media as a strong competitor, but a few of these newspapers succeeded in the economic field by keeping pace with the events we witnessed during the last stage,

New if we say that the morning comes in the forefront of its sisters from the Iraqi newspapers, so that it became a platform for all and different aspects of intellectual and school science in
economics.

What counts for the morning is not only keeping up with the events, but also taking the lead in many times in news and information, as well as its role in motivating and taking care of many important topics and putting them under the spotlight and at the dialogue table with a group of specialists to diagnose the economic imbalances through constructive criticism in a process matured by experience to reach what is It is
today.

The process of maturity has been the objectives of the economic morning, it seeks to raise the level of professional and treatment in the impartial opinion to serve the highest goals of the country away from the goals of self or interim and this is clear today where it could declare it as a page for all without exception, Professionalism and impartiality.

As I say, my testimony is insulted to the economic page and its employees because I have a brotherly relationship that has been consolidated during the experience of writing the weekly column since more than one year, prepared by one of my best experiences in writing to the press.

Economic woes that we believe are important to the general public and the economists in
particular.

The morning has contributed during the last year to at least the coverage of many important topics and may be the most prominent coverage of the activities of the week of financial inclusion, which was established in cooperation between the Central Bank of Iraq and Iraqi banks and this coverage was not just a press duty as much as it was a national duty to the importance of awareness in this

The important project that is being worked out now in Iraq, finally a word of thanks should be given to all the workers in the morning and especially the brothers in the economic page with my wishes to all with success and every year and morning okay.

http://www.alsabaah.iq/ArticleShow.aspx?ID=157378

By John Lee.

Newtechnic, which describes itself as a world leader in building engineering technology, has reportedly won the contract to design the facade and oversee the co-ordination and construction of the new Central Bank of Iraq (CBI) building in Baghdad.

According to New Civil Engineer, the building, designed by Zaha Hadid Architects (ZHA), will be 172m high and will stand on a 200m by 100m podium.

Chief Executive Andrew Watts said he will deploy UK- and US-based design-engineering teams to work on the project, which is expected to be completed by 2021.

More here.

(Source: New Civil Engineer)