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.

By John Lee.

With a 600 per cent rise in COVID-19 cases in Iraq through June, efforts must be re-doubled to slow the spread of the disease, warns the International Rescue Committee (IRC).

With the number of confirmed cases standing at 53,708 on July 1 – up from 6,868 on June 1 – the Ministry of Health has announced that hospitals are almost at full capacity, and that schools and universities will be converted into isolation units to cope with the ever-increasing number of cases.

In addition to the direct impact the pandemic is having on people’s health, thousands of people have been affected indirectly by the economic impacts of the lockdown.

More here.

(Source: IRC)

By Al-Monitor staff. Any opinions expressed are those of the author(s), and do not necessarily reflect the views of Iraq Business News.

Iraq returns to lockdown after surge in coronavirus cases

A Turkish military jet delivered coronavirus-related aid to Iraq on Wednesday.

The assistance comes as Turkey continues its war against Kurdish militants in the country, despite opposition from Baghdad.

Click here to read the full story.

The Government of Finland has committed €2 million (US$2.2 million) to support the Government of Iraq’s response to the COVID-19 pandemic, in partnership with the United Nations Development Programme (UNDP) in Iraq.

The funds will be used to support UNDP Iraq’s COVID-19 response package, which is being implemented under the umbrella of UNDP Iraq’s Funding Facility for Stabilization (FFS), established to repair critical infrastructure and services damaged by ISIL.

Measures to combat the virus under the COVID-19 response package include increasing the testing capacity of laboratories, providing personal protective equipment to healthcare workers, increasing the number of isolation wards, and undertaking assessments to establish post-COVID-19 recovery strategies.

Focusing on the most vulnerable communities in Iraq, activities will be rolled out in hospitals selected by local authorities in the underserved areas of Anbar, Basra, Diyala, Dohuk, Karbala, Kirkuk, Najaf, Ninewa and Salah Al-Din.

UNDP Iraq’s Resident Representative, Zena Ali Ahmad, said:

“While the entire country is impacted by the emergence of COVID-19, it’s the vulnerable communities – including displaced communities, people living with a disability, women, and the elderly – who will carry most of the burden. We’re extremely grateful for Finland’s support which will help us target these vulnerable communities.”

Finland’s Ambassador to Iraq Mr. Vesa Häkkinen (pictured), added:

“Iraq is facing a multitude of challenges as it recovers from a long conflict. Finland wants to support the stability of Iraq and to strengthen its preparedness and response to COVID-19 emergency. UNDP is in the frontline supporting Iraq’s national healthcare system in tackling the outbreak.”

Finland is one of UNDP Iraq’s key partners, providing more than $12.1 million to UNDP Iraq’s FFS since 2015.

(Sources: Reliefweb, Finnish Ministry for Foreign Affairs)

By Al-Monitor staff. Any opinions expressed are those of the author(s), and do not necessarily reflect the views of Iraq Business News.

Survey: Displaced Iraqis experiencing job losses, food shortages amid pandemic

The majority of displaced Iraqis have experienced job losses, food shortages and more during the COVID-19 pandemic, according to a recent survey by humanitarian organizations working in the country.

Click here to read the full story.

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: https://bit.ly/2VDbH3a

(Source: UN)

By John Lee.

Prime Minister Mustafa Al-Kadhimi chaired on Monday a meeting in Baghdad of the Higher Committee for Health and National Safety.

At the start of the meeting, the Prime Minister told the Committee that the coronavirus pandemic challenge facing Iraq is unprecedented, and that this challenge has been exacerbated by cumulative past administrative failures.

Following discussions, the Committee decided to:

  • Provide the necessary additional funding, through inter-government fiscal transfer arrangements, to the Ministry of Health
  • Direct state-owned profitable and self-financing enterprises to support the Ministry of Health, and for the extra funds to be used by the provincial health authorities for the direct purchase of medicine and medical supplies
  • Permit the Ministry of Health to recruit additional medical staff, both on continuing and short term contracts, and to fund their salaries through inter-government fiscal transfer arrangements
  • Direct the General Secretariat of the Council of Ministers to prepare a draft law to grant medical and health professionals who have died as a result of their work combatting Covid-19 a pension equal to their last salary
  • Allow a number of  accredited private laboratories to conduct Covid-19 tests based on the strict criteria set by the Ministry of Health
  • Permit oxygen imports to enter Iraq via all border crossings, and to suspend payment by the Ministry of Health of the cost of oxygen supplies until its finances have recovered
  • Amend the partial curfew to start from 7 PM to 6 AM in line with the increase in daylight hours
  • Direct Baghdad Operations Command and the operations commands in the provinces to strictly enforce the curfew restrictions, and to hold them responsible for curfew violations
  • Direct Baghdad Municipality and the Directorate Civil Defence to disinfect areas in Baghdad which have a high rate of Covid-19 cases 
  • Exclude staff of the Arab Company for Antibiotic Industries and Supplies (AKAI) from curfew restrictions 
  • The Ministry of Health and the Ministry of Foreign Affairs shall coordinate with other countries which have announced that they are working on a potential treatments for Covid-19, and to negotiate with these countries to ensure that Iraq receives the necessary medicines and supplies  

(Source: Govt of Iraq)

By John Lee.

Prime Minister Mustafa Al-Kadhimi chaired on Monday a meeting in Baghdad of the Higher Committee for Health and National Safety.

At the start of the meeting, the Prime Minister told the Committee that the coronavirus pandemic challenge facing Iraq is unprecedented, and that this challenge has been exacerbated by cumulative past administrative failures.

Following discussions, the Committee decided to:

  • Provide the necessary additional funding, through inter-government fiscal transfer arrangements, to the Ministry of Health
  • Direct state-owned profitable and self-financing enterprises to support the Ministry of Health, and for the extra funds to be used by the provincial health authorities for the direct purchase of medicine and medical supplies
  • Permit the Ministry of Health to recruit additional medical staff, both on continuing and short term contracts, and to fund their salaries through inter-government fiscal transfer arrangements
  • Direct the General Secretariat of the Council of Ministers to prepare a draft law to grant medical and health professionals who have died as a result of their work combatting Covid-19 a pension equal to their last salary
  • Allow a number of  accredited private laboratories to conduct Covid-19 tests based on the strict criteria set by the Ministry of Health
  • Permit oxygen imports to enter Iraq via all border crossings, and to suspend payment by the Ministry of Health of the cost of oxygen supplies until its finances have recovered
  • Amend the partial curfew to start from 7 PM to 6 AM in line with the increase in daylight hours
  • Direct Baghdad Operations Command and the operations commands in the provinces to strictly enforce the curfew restrictions, and to hold them responsible for curfew violations
  • Direct Baghdad Municipality and the Directorate Civil Defence to disinfect areas in Baghdad which have a high rate of Covid-19 cases 
  • Exclude staff of the Arab Company for Antibiotic Industries and Supplies (AKAI) from curfew restrictions 
  • The Ministry of Health and the Ministry of Foreign Affairs shall coordinate with other countries which have announced that they are working on a potential treatments for Covid-19, and to negotiate with these countries to ensure that Iraq receives the necessary medicines and supplies  

(Source: Govt of Iraq)

Awareness is key to flattening the COVID-19 curve in Iraq

The World Health Organization (WHO), in collaboration with the Ministry of Health of Iraq, today began a major COVID-19 awareness-raising campaign targeting people living in high-risk and heavily affected areas in the Iraqi capital Baghdad.

The campaign will mobilize more than 250 community volunteers to deliver critical information, education and communications materials to approximately 6 million people living in 10 heavily populated districts for 4 weeks from 29 June to 28 July 2020.

“Health is the responsibility of all, and raising people’s awareness is essential to containing the aggressive spread of COVID-19,” said Dr Adham R. Ismail, WHO Representative in Iraq. “WHO, the Ministry of Health, partners and donors are working hand in hand to fight this pandemic, and until a vaccine is developed we have to unite our efforts to flatten the curve and keep our communities healthy and safe,” he added.

The campaign will use mobile screens, booths and mobile medical clinics to display WHO educational videos and audio messages on a variety of protective and disinfection measures. State and private radio and TV channels will support the campaign with daily messages for the month. In addition personal protection packages containing masks, hand sanitizers, campaign slogan T-shirts and caps, COVID-19 awareness-raising flyers and other educational materials will be distributed to people in public places, main streets and bazaars.

Iraq recently reported a significant increase in the number of cases in Baghdad after lockdown measures were eased nationwide. Health authorities have tied the increase in numbers to increased testing capacity and improved active surveillance and weak adherence of people living in crowded districts to adopting protective measures as recommended by WHO and the Ministry of Health, such as practising good hand hygiene and social distancing and wearing masks.

The campaign includes support from key religious figures who have mobilized thousands of mosques in the capital to disseminate audio messages. “With no cure yet but prevention, we have to continue educating our people on the importance of following the health advice of WHO and the national health authorities to save our lives and protect our health workers,” a cleric attending the campaign opening in Sadir City, where the vast slums of eastern Baghdad are located, commented.

“WHO is aware of the challenging impact of the lockdown and movement restrictions on the limited and daily income which families in many areas in Baghdad earn. However, the Organization urges all individuals to follow safety measures and wear masks in gatherings and public places, keep hands clean, and pratise social distancing to stop transmission of the virus,” Dr Adham stressed.

WHO would like to extend its thanks to the Government of Kuwait and the European Union Civil Protection and Humanitarian Aid (ECHO) for co-funding this campaign, and to WHO’s implementing partner the United Iraqi Medical Society for supporting its implementation.

(Source: WHO)

By Adam Lucente for Al-Monitor. Any opinions expressed are those of the author(s), and do not necessarily reflect the views of Iraq Business News.

Frustration builds as Iraq’s airports remain closed amid rising virus cases

When Iraqi aviation authorities first closed airports to commercial passenger flights March 17 in an effort to curb the spread of COVID-19, they only gave about a day’s notice.

With flights already limited regionally, many got stuck.

The first ban was set to end March 24. But it has been continuously extended since.

Click here to read the full story.