By John Lee.

Iraq’s national lockdown in response to the coronavirus (COVID-19) pandemic has reportedly given a boost to local businesses.

According to a report from AFP, local businesses no longer have to compete with imports from countries such as Turkey, Iran, China, Saudi Arabia, Jordan and Kuwait.

It quotes the owner of an ice-cream factory in Basra as saying:

“The coronavirus crisis has allowed us to prove ourselves on the Iraqi market.”

More here.

(Source: AFP)

By John Lee.

His Excellency Prime Minister Mustafa Al-Kadhimi received Chinese Ambassador to Baghdad Zhang Tao congratulated His Excellency the Premier Al-Kadhimi for swearing-in as Prime Minister, and extended the Chinese Premier greetings, reaffirmed china aspiration to strengthen the relationship with Iraq.

Ambassador Zhang Tao underscored China support to Iraq in the international affairs, in strengthening its sovereignty and territory unity, also in counter-terrorism, and invited His Excellency the Premier Al-Kadhimi to Visit Beijing.

From his side; the Premier AL-Kadhimi thanked the Chinese Ambassador on the congratulation, confirmed that Iraq appreciated China support in combating coronavirus pandemic, and expressed his aspiration for strengthening the economic bilateral relationship to address the current crisis which resulted from the Oil prices decline, also strengthening Chinese investment companies in Iraq in the field of energy, and in the agriculture to develop fertile lands that non-cultivated
Media Office of the Prime Minister.

(Source: Office of the Iraqi Prime Minister)

By John Lee.

Egypt-based GB Auto (Ghabbour Group) has been appointed as the distributor of the Chinese-owned MG car brand in Iraq.

According to Trade Arabia, the new partnership will see six MG showrooms opened across the country, in Erbil, Baghdad (on 62 St and at Baghdad Mall), Duhok, Sulaymaniyah and Basrah.

Operations are expected to commence in late-Q3 or early-Q4 of this year.

(Sources: GB Auto, Trade Arabia)

IBBC joins World Free Zones (FZO) as observer partner

The Iraq Britain Business Council (IBBC) is delighted to announce a new partnership as observers with FZO, the international association of World Free Zones.

World Free Zones Organization (World FZO) is the strongest, most active free-zone organization in the world. IBBC and its members can access strategic objectives, make connections that matter, and engage with the industry’s most powerful insights, resources and tools.

Samira Samez membership engagement manager, explains that FZO HQ is in Dubai, with over 2000 FZO members globally, in Middle East ( Esp GCC) , India, China, North and South America, Africa, Europe and Central Asia they represent the leading association in their field.

IBBC members can access their knowledge platform, Consulting capabilities on Government, Marketing and business models, as well as reports from the library on setting up Free Zones, Guidance, and benefits to economic growth. Finally, the FZO hold an annual conference, set for Jamaica in 2021. Currently FZO are not in Iraq, but hope to establish as some stage, to support economic growth and business diversity.

Dr Samir Hamrouni.Ceo of FZO said:

“As the single global voice of free zones around the globe, we are proud to count amongst our membership over 640 entities in 130 countries. We are delighted to welcome the Iraq Britain Business Council as our latest member and look forward to working with them to further develop the Iraqi free zones and grow trade across Iraq and the rest of the world.”

Christophe Michels, MD, IBBC said:

“IBBC and FZO together are able to provide mutually supportive business opportunities for our members around the world and for FZO members to consider Iraq as an investment opportunity’

For more information please contact london@webuildiraq.org

(Source: IBBC)

China’s Recon Technology has announced that it has signed a $2.8-million engineering and construction service subcontract with Grand Energy Development Limited on a heavy oil transportation system project (the “Project”) at the Garraf oilfield in Iraq for the services that Recon has provided.

Pursuant to the subcontract, Recon shall carry out all the engineering design services, provide the technical support to the procurement, construction, commissioning activities and provide the training services of the heavy oil transportation system project.

Garraf oilfield is located in the province of Thi Qar, Iraq, approximately 5km north-west of Al-Refaei city and 85km north of Nasiriya city. The oilfield is 17.5km long and 5.5km wide. It is estimated to hold 1.3 billion barrels of oil reserves.

Based on the Final Development Plan approved by the Government of Iraq in 2018, the oilfield is undergoing further development in stages to achieve crude oil production of 230,000 barrels per day by the end of 2020.

As part of the Project, the heavy oil pipeline with a total intended capacity of 275,000 barrels per day will be built to support the Garraf production target. By providing the services under the Project, Recon has played an important role in building the heavy oil pipeline.

Shenping Yin, co-founder and CEO of Recon said:

With advanced technique and wide experiences in the automation and digitalization of oil and gas industry, Recon has a relatively competitive advantage in the engineering design and construction businesses in oilfield segment.

“With the successful completion of the project, we expect to construct more oilfield projects and hope to help more oilfields reduce costs and maintain yields at a healthy level in the near future.

Recon Technology, Ltd. (RCON) is China’s first non-state-owned oil and gas field service company listed on NASDAQ.

(Source: Recon)

By John Lee.

Two rockets have reportedly struck near a Chinese oil facility south of Baghdad on Saturday.

According to AP, there were no casualties.

It cites an Iraqi army statement saying the rockets struck near a Chinese company in the Nahrawan area, and speculates that the company involved is ZhenHua, a subsidiary of the arms manufacturer Norinco, which has been working in the nearby East Baghdad oil field.

(Source: AP)

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 herd instinct among forecasters
makes sheep look like independent
thinkers
” — Edgar Fielder

The crash in oil prices, brought on by the oil price war between Russia and Saudi Arabia, and the collapse in consumption due to COVID-19, seems like the perfect storm to hit Iraq given its vulnerabilities to such external shocks.

Though, this is not the first perfect storm to hit it. The last one which was arguably more perfect than the current one took place in the summer of 2014 when ISIS took over a third of the country, threatening its imminent break-up, and for good measure oil prices crashed.

As in 2014, the fall in oil prices poses serious threats to Iraq’s oil-dependent economy, but the current storm hits a very different Iraq from that of 2014 – especially changed this time is its equity market. Then, the equity market was at the end of a multi-year bull market that, as measured by the Rabee Securities RSISX USD Index (RSISUSD), had almost doubled by early 2014 from the levels of 2010.

Comparatively, now the equity market is at the end of a multi-year bear market that saw it decline 71% from the 2014 peak. Fuelling the 2014 bull market were foreign investor inflows and the government’s multi-year investment spending program which boosted the economy and domestic liquidity. The opposite is true in the current bear market with most foreigners having withdrawn from the market and the government’s investment spending having been practically non-existent for a number of years.

RSISUSD Index: Bull market 2010-2014 – Bear Market 2014-2020

(Source: Bloomberg)

The significant drop in oil revenues will force the government to sharply curtail expenditures in the same way that it did in 2014-2016, with negative consequences for the economy, yet unlike then the cuts will not be magnified by the need to shift resources to the sharply increasing cost of the ISIS conflict. The combination of the different profiles of investment spending and expenditures have vastly different implications for both the economy and equity market.

In 2014-2016 the dramatic cuts to investment spending and diversion of resources towards the war effort led to year-over-year contractions in non-oil gdp of 3.9% and 14.4% in 2014 and 2015 respectively. The severity of the drop was such that the small bounce of 1.3% in 2016 was followed by a 0.6% drop in 2017. The multiplier effect of these contractions negatively impacted corporate earnings and ultimately led to the equity market’s multi-year decline.

Today’s different circumstances mean that the non-oil economy will not face the same severe double whammy as then, and as such the contractions will be of a different magnitude. It will nevertheless be negatively impacted by the effects from the COVID-19 lockdown far more than any cuts to the government’s investment spending. While every sector of the economy will feel the effects of the lockdown, the informal sector which is dominated by retail and hospitality and which accounts for the bulk of private sector economic activity will be particularly hard hit. Whereas, these effects on the equity market will be through a few sectors that dominate the market, consisting of banking, telecoms and consumers staples.

The banking sector was hurt the most between 2014-2016 as the cuts to the government’s investment spending were disastrous for private sector businesses at the receiving end of the cuts, whose finances deteriorated. This in turn affected the quality of bank loans as these businesses accounted for the bulk of bank lending. Consequently, the banks’ earnings suffered from the increasing non-performing loans (NPL’s) coupled with negative loan growth, as well as losing funding sources due to negative deposit growth. The scale of the effects on private sector businesses from any future cuts by the government ought be smaller this time around and should not lead to the same negative effects for the banking sector. However, it would be reasonable to assume that the sector’s tentative recovery will be on hold, while any reversal would be limited given the nascent recovery prior to the COVID-19 shock and the sector’s limited exposure to the informal economy. With the sector contributing the most to the market’s 71% decline from the 2014 peak, it’s difficult to see how bank stock prices can decline much further in response to these developments.

Other reasonable assumptions that can be made are that telecom stocks could benefit from the increased need for broadband induced by the lockdown, while any moderation in consumption for soft drinks – whose local bottler accounts for the bulk of the consumer staples sector market capitalization in the equity market – should be limited. These are very early thoughts and much more data, on the economy and company specific, are needed before any meaningful analysis can be made. However, such data and analysis in the short term will play second fiddle to shifting expectations on the future direction of oil prices.

Forecasting the direction of oil prices, especially at critical junctures, is fraught with uncertainty, as subsequent prices have made a mockery of all predictions throughout recent history: from those calling for ever higher prices when “peak oil” was the consensus thinking, to those calling for ever lower prices when “lower for longer” became the consensus. However, analysing the supply-demand for oil, while equally fraught with uncertainty, it is possible to analyse a few broad trends to help frame expectations for the general direction of prices.

The effects of the lockdowns related to COVID-19 have been profound on the global demand for oil given that about 60% of consumption comes from transportation. The first contraction in demand was seen when China went into lockdown in January and expanded as the rest of the world followed suit in March. Current expectations call for a decline in April of up to 20 million barrels per day (mbbl/d) from initial world oil demand estimates of 101mbbl/d.

The known nature of the virus precludes a return to full normalcy when global lockdowns are expected to ease from mid-summer onwards. Combined with the unknown nature of the new normal as the world learns to deal with and ultimately contain the virus, the return to a pre-virus oil demand picture is unlikely within the next 12 months. But, in six to nine months demand for oil should recover from the extreme lows of April and trend upwards to a small drop from base-line demand by year end, as suggested by the chart below.

Global Oil Demand Impact from COVID-19

(Source: CNBC 26/03/2020 citing Goldman Sachs Investment Research, International Energy Agency, Bloomberg, Reuters, New York Times)

The supply-side of the equation is much harder to predict given the multitude of possibilities of producer reactions to low, yet extremely volatile oil prices in which a great deal of oil production becomes uneconomical. The International Energy Agency (IEA) estimates that about 3.8-5.0mbbl/d of global production is uneconomical at $25-30/bbl prices for Brent crude. The industry has responded to the severe price drop by cutting expenses and in particular capital spending plans with the IEA reporting a range of 20-30% in cuts to initial plans for 2020. It would be reasonable to conclude that these and other actions would lead to the removal of about 2-5mbbl/d from an initial supply estimate of 102mbbl/d for 2020. But these will take a few months to alter the supply-demand imbalance and as such all the excess supply will end up in storage.

Global crude storage capacity will likely be maxed out in the next few weeks, currently estimated at 63% capacity with an effective full capacity at 80%, which will force additional significant production cuts above and beyond the above mentioned 2-5mbbl/d – this time by economically viable crude producers. This will likely accelerate, or pre-empt, the currently discussed plans for a new round of coordinated production cuts by OPEC+, or OPEC++ if other countries such as the U.S. join.

All of the above will likely mean that oil prices will remain under pressure for the next 9 to12 months, probably in a price range of $30-40/bbl for Brent crude. However, with a return to some sort of post-lockdown normalcy in early 2021, low oil prices should stimulate demand, and coupled with the massive worldwide fiscal stimuli to the global economy should begin to recover. Following a time-lag, as demand absorbs the stored supply, the supply-demand picture should be tilted in supply’s favour, and oil prices will trend higher – likely to a price range of $45-55/bbl for Brent crude.

The outlook for Iraq, within this scenario, i.e. an average of $30-40/bbl for Brent crude over the next 12 months, is far from benign, but hardly bleak. As noted here in the past, the economic consequences from the continued political paralysis would be that no new budget will be passed, and thus the government will continue to implement the current spending parts of the 2019 budget. However, it will embark on dramatic cuts to investment spending plans and expenditures on goods and services, though it will maintain expenditures on salaries, pensions and social security. These measures could lead to annual expenditures of $69bn resulting in a cumulative 12-month budget deficit of $25bn-38bn. This can be comfortably funded by indirect monetary financing by the Central Bank of Iraq (CBI), with its foreign currency reserves of $67bn as of the end of 2019.

Beyond the next 12 months, Brent crude prices in a range of $45-55/bbl will remove much of the pressure on government finances, but the exact timing of the post-lockdown return to normal with the new level of oil prices means that Iraq cannot avoid embarking on an accelerated and significant set of economic reforms, previously agreed to with the IMF in the 2016 Stand-By Agreement (SBA) but abandoned when oil prices recovered in 2018. However, with an increasingly alienated population these reforms would not come about without meaningful political reforms.

As a measure to contain the outbreak of COVID-19, the government announced a one-week nationwide curfew, starting on March 16th that was extended twice to April 11th. Trading on the Iraq Stock Exchange (ISX) was suspended in response to these instructions and the market, as measured by Rabee Securities RSISX USD Index (RSISUSD), ended the month down 7.1%.

The concentrated selling in the few foreign favoured stocks that began in January continued into March. However, as in February, the list narrowed further, and turnover declined. Given the uncertain global economic outlook, this selling could continue when the market resumes trading. Nevertheless, as Iraq’s equity market was discounting neither an economic nor a corporate earnings recovery, it’s difficult to see why it should decline as other markets have elsewhere. Most global markets have had multi-year bull markets and would need to discount vastly different economic assumptions than those that led to their multi-year rises. This explains the better action by the ISX compared to other markets during the recent sell-off – the decline, at least until March 16th, was less than other markets as can be seen from the chart below and arguably makes the risk-reward profile more attractive for the ISX versus these markets as portfolio allocations are rebalanced in the light of the changed global environment.

Trailing 12-months normalized returns for the RSISUSD Index vs MSCI World Index, MSCI Emerging Markets Index and MSCI Frontier Markets Index.

(Source: Bloomberg)

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.

Over the past few years, Iraq’s health system has faced many challenges, including internal conflict and the world’s biggest mass displacement in 2014-2016, all of which had a tough toll on an already fragile health system.

With the detection of COVID-19 in China in December 2019, WHO immediately initiated preparedness efforts, and arranged a series of technical meetings with emergency teams in both federal and regional ministries of health to assess health facilities’ resources and preparedness capacities to respond to a potential importation of the disease.

The sudden eruption of the virus in neighbouring Islamic Republic of Iran scaled up the risk of the disease spread in Iraq and necessitated faster prevention and infection control measures especially in the holy cities and pilgrimage sites, bordering governorates, and vulnerable communities in internally displaced and refugee camps.

Dr Adham Ismail, WHO Representative and Head of Mission in Iraq, said:

WHO is aware of the impact of a pandemic like COVID-19 on Iraq’s health sector and recovering services.

“We discussed with the health authorities in the Center and Kurdistan Region the means of urgent support to contain the transmission of the disease in the country. Joint work is underway and cooperation is at highest levels.

On 2 February, WHO proactively began strengthening national disease surveillance capacities in Iraq and providing case definition and management training, in addition to large-scale risk communications activities.

Hundreds of thousands of prevention and transmission control messages were printed and provided to 20 directorates of health in the 18 governorates, including the Kurdistan region governorates of Erbil, Dohuk, and Suleimaniya.

Mobile health teams took to main streets, public and religious places, remote cities and hard-to-reach villages in addition to airports, border points, state institutions, and camps hosting refugees and internally displaced people.

Maha Salam and Najah Ahmed from Wasit Directorate of Health in Wasit governorate, eastern Iraq, were among the mobile health team distributing WHO health messages to the public as early as 16 February 2020.

Early mobilization campaigns to distribute WHO COVID-19 educational materials succeeded in raising public awareness and readying preparedness efforts to protect individual health and that of the community in general.

WHO is working with the federal and regional ministries of health to increase and augment case management capacities, as well as detection and surveillance.

An urgent consignment of PPEs and laboratory test kits was delivered to ministries of health to enable the timely detection of cases and protect health workers in designated hospitals.

As of 30 March, Iraq reported a total of 572 confirmed cases with 42 deaths and 143 recoveries all over the country. The reported figures are still moderate so far, but WHO expects a spike in the coming two weeks due to the scale up in laboratory testing capacity which are going to be of high importance in terms of infection transmission and control,” concluded Dr Ismail.

(Source: WHO)

By John Lee.

French container transportation and shipping company CMA CGM, has announced the first closing of its agreement with China Merchants Port (CMP), with the sale of its stakes in eight port terminals to Terminal Link. Among the facilities involved is the Umm Qasr Terminal in Iraq.

The Terminal Link joint venture was created in 2013 and is 51% owned by CMA CGM and 49% by CMP.

In line with the terms and conditions of the agreement announced on 20th December 2019 this first transaction represents a total all-cash consideration of USD 815 million. It will enable Terminal Link to expand its geographic footprint and global network, thereby enhancing its business development prospects.

This initial disposal includes the following terminals:

  • Odessa Terminal (Ukraine)
  • CMA CGM PSA Lion Terminal (CPLT), Singapore
  • Kingston Freeport Terminal (Jamaica)
  • Rotterdam World Gateway (Netherlands)
  • Qingdao Qianwan United Advance Container Terminal (China)
  • Vietnam International Container Terminal, Ho Chi Minh City (Vietnam)
  • Laem Chabang International Terminal (Thailand)
  • Umm Qasr Terminal (Iraq)

The sale of the last two terminals covered by the agreement between CMA CGM and CMP should be completed by the end of first-half 2020 for an all-cash consideration over USD 150 million, pending approval by the competent regulatory agencies.

With this transaction, CMA CGM is proceeding with the delivery of its USD 2.1 billion liquidity plan announced on 25th November 2019. This plan among others reduces CMA CGM consolidated debt by more than USD 1.3 billion by the end of first-half 2020 and allows to extend certain financing facilities maturing during the year.

The CMA CGM Group strengthens its balance sheet amidst the high uncertainty created by the global Covid-19 health crisis. While the crisis has had a limited impact in the first quarter of 2020, the Group expects a decline in volumes, particularly outbound to Europe and the United States.

On this occasion, Rodolphe Saadé, Chairman and Chief Executive Officer of the CMA CGM Group, states:

“This transaction, announced on the 20th of December 2019, is an important step in its 2.1 billion USD liquidity plan and will allow us to strengthen our balance sheet. Amid the high uncertainty created by the COVID-19 health crisis, the closing of this transaction as previously announced demonstrates the resilience of the CMA CGM Group.”

(Source: CMA CGM)