By John Lee.

Iraq’s Minister for Electricity has said Iraq is looking to finance a $3 billion upgrade of its power transmission and distribution network.

The National quotes Minister Luay Al Khateeb as saying:

“We do have a fast track plan for $3 billion to upgrade the distribution and transmission of which $2bn is for the transmission and $1bn for the distribution.

“These are required immediately to make the national grid capable of delivering 20 hours of electricity across Iraq but this is all subject to the approval of the council of representatives for budget.

“I’m open to credit lines for financial support to finance these projects, even these require approval of council of ministers when it comes to planning for the budgets and government loans.”

More here.

(Source: The National)

By John Lee.

Iraq’s Cabinet of Ministers has approved a loan agreement between the Federal Ministry of Finance, Standard Chartered Bank and the German Deutsche Bank for the purpose of financing the construction of 13 secondary substations (132) kV, and the supply of 35 high voltage transformers with the German company, Siemens, for the Ministry of Electricity.

The Cabinet also approved the recommendation of the Ministerial Council on Energy to expand Bismayah power plant.

(Source: Government of Iraq)

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

The market drifted lower in an Eid-holiday shortened month, as turnover declined substantially from July. However, life found its way back to the banks. For the month, the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), was down −0.95% and down −4.89% for the year.

Average daily turnover declined −40% month-month and was the third lowest level over the last five years- the others being April 2019 and September 2018 as can be seen from the chart below. Foreign investors continued to be net buyers, consistent with the trend of the last few months, although at lower total levels in-line with the decline in total turnover.

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

The market’s dynamics continue to improve with the return of life to the banking sector, which as a group cooled-off over June and July after a powerful rally in May led by the Bank of Baghdad (BBOB). This month, the group was led by the National Bank of Iraq (BNOI), which was up +21.1% for the month and up +58.6% from the April close before the sector started its rally.

Moreover, its earnings report for the second quarter 2019 (Q2/2019) supported management’s bullish outlook for 2019 as expressed in its latest AGM. As reported here, in June’s update, while management decided not to distribute dividends for a challenging 2018, it indicated the possibility of resuming dividend payments for 2019 based on its strong results for the first half of the year, as well as positive expectations for the second half.

BNOI’s first half 2019 (H1/2019) results show customer deposits were up +28% year to date, while its loan book was up +77% for the same period. Pre-tax earnings for the second quarter were up +48% sequentially, with the year to date figure showing promise for the year – a long way to go before recovering to pre-crises levels- but supporting management’s expectations for the resumption of dividend payments for 2019’s earnings.

While it’s not possible to extrapolate much from these results, or to generalize for the sector from them, they support in any case the thesis, made here in the last few months, which argues that the conditions are in place for the sector’s recovery in 2019-2020. The Commercial Bank of Iraq’s (BCOI) Q2/2019 earnings, while supporting this thesis, nevertheless show the unevenness of these conditions given the different circumstances of each bank. BCOI’s consumer deposits in H1/2019 were up +6% year to date, while its loan book declined by −7% – however, BCOI’s loan book is insignificant at under 8% of its deposits. BCOI was up +4.4% for the month and up +17.5% from the April close before the sector started its rally.

The most interesting development for the sector during the month was the trading action in the Bank of Baghdad (BBOB), which at some stage was up +10.7%, before trimming most of these gains, to end up +3.6%. This comes on the back of its four-month wild ride, during which it rallied +62.5% in May, declined −12.8% in June, declined a further −17.6% in July, to end in August up +20.8% from the pre-rally close.

The stock’s ride started on speculative hopes that BBOB would resume dividend payments for its 2018 results, sputtered as BBOB poured cold water over these speculative hopes during its recent AGM, but seems to still have plenty of fuel left. This could imply that the market is looking past the bank’s difficulties and focusing, instead, on the prospects of a bank following through with the recovery in its fortunes that began in 2018 as part of the overall conditions in place for the sector’s future revival.

The market’s looking past the weaknesses of BBOB is a further positive aspect of its improving dynamics as pointed here last month “While, BBOB pulled the other leading banks up with it in May, it did not drag them lower in June and July which is very different than the market’s responses to such disappointments in 2018. That time all banks were painted by the same brush, which shows a market that has begun to discriminate showing it has likely bottomed or is making a bottom.” The year to date chart below for four leading banks shows these very different responses.

Year to date indexed performance: Bank of Baghdad – BBOB (green), Commercial Bank of Iraq – BCOI (blue), Mansour Bank – BMNS (mauve), National Bank of Iraq – BNOI (brown)

(Source: Bloomberg)

The early picture of the trading activity in September suggests that it will likely be in-line with that of August. Whilst the market is in the early process of discounting the banking sector’s recovery, it’s worthwhile to point out its continued divergence from its past close relationship with oil revenues (a proxy for the forces driving the economy) – still at the widest it has been for the last few years (see below).

(Sources: Iraq’s Ministry of Oil, Rabee Securities, Asia Frontier Capital)

(Note: Oil revenues as of Jul, AFC estimates for Aug)

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.

The Iraqi Foreign Ministry has signed a Memorandum of Understanding with the General Secretariat of the League of Arab States, which includes exempting Iraq from 75% of its debts within the support funds provided to Arab countries, scheduling the remaining amount and paying for its contributions to the budget of the General Secretariat of the League of Arab States.

The issue of exempting Iraq from 75% of these debts was one of the items on the agenda of the Arab Summit in Tunisia voted by the Arab leaders, and as a result of the diplomatic efforts carried out by the Ministry, and the Iraqi Representation in the League of Arab States.

This memorandum was one of the topics of the talks held by Foreign Minister Mr. Mohamad A. Alhakim (pictured) in his meeting with the Secretary General of the League of Arab States, Mr. Ahmed Aboul Gheit, in Baghdad, which resulted in expediting its signature and bringing it into force.

The MoU was signed by Ambassador Mr. Ahmed Nayef Rashid Al-Dulaimi, Ambassador of the Republic of Iraq to Cairo, and Mr. Abdullah Sorour Al-Jarman, Head of Administrative and Financial Affairs Sector at the General Secretariat of the League of Arab States.

(Source: Iraqi Foreign Ministry)

By John Lee.

Moody’s Investors Service has affirmed the Government of Iraq’s long-term issuer and senior unsecured ratings at Caa1 and maintained the stable outlook.

The decision to affirm Iraq’s Caa1 ratings reflects credit challenges posed by very weak institutions and governance that in Moody’s view, will continue to limit policy effectiveness, constrain the government’s capacity to respond to external and domestic shocks and weigh on the — currently very weak – competitiveness of Iraq’s economy.

The Caa1 rating level also captures Iraq’s inherently very high level of political risk, in part related to political strife which will slow reform progress, hamper a strengthening of institutions and contribute to maintaining very high fiscal, external and economic vulnerability to potential declines in oil prices.

More here.

(Source: Moody’s Investors Service)

(Picture: Bonds, from Alexskopje/Shutterstock)

The Ministry of Planning and the United Nations signed a Memorandum of Understanding (MoU) to establish the Iraq Reconstruction and Recovery Trust Fund in support of the Government’s Recovery and Development Framework.

Iraqi Minister of Planning Dr. Nouri Sabah al-Dulaimi signed on behalf of the Government of Iraq. Marta Ruedas, the Deputy Special Representative of the United Nations Secretary-General for Iraq and Humanitarian and Resident Coordinator, signed on behalf of the United Nations.

The MoU falls in the framework of cooperation, is in line with the Iraqi government’s commitments under the provisions of the Kuwait Conference in 2018, and will help in articulating the international community’s pledges made at that time.

Ms. Ruedas said:

“This Fund is a way to channel the commitments from the Kuwait International Conference for Reconstruction of Iraq. We are pleased to continue supporting the Ministry of Planning and the Government of Iraq in the implementation of this agenda as well as the longer-term Sustainable Development Goals”.

The Trust Fund is in support of the Government’s Recovery and Development Framework as defined in the Recovery and Resilience Programme and for the required policy and programme support to the Government’s achievement of its SDGs targets and its Vision 2030.

(Source: UN)

The Ministry of Planning and the United Nations signed a Memorandum of Understanding (MoU) to establish the Iraq Reconstruction and Recovery Trust Fund in support of the Government’s Recovery and Development Framework.

Iraqi Minister of Planning Dr. Nouri Sabah al-Dulaimi signed on behalf of the Government of Iraq. Marta Ruedas, the Deputy Special Representative of the United Nations Secretary-General for Iraq and Humanitarian and Resident Coordinator, signed on behalf of the United Nations.

The MoU falls in the framework of cooperation, is in line with the Iraqi government’s commitments under the provisions of the Kuwait Conference in 2018, and will help in articulating the international community’s pledges made at that time.

Ms. Ruedas said:

“This Fund is a way to channel the commitments from the Kuwait International Conference for Reconstruction of Iraq. We are pleased to continue supporting the Ministry of Planning and the Government of Iraq in the implementation of this agenda as well as the longer-term Sustainable Development Goals”.

The Trust Fund is in support of the Government’s Recovery and Development Framework as defined in the Recovery and Resilience Programme and for the required policy and programme support to the Government’s achievement of its SDGs targets and its Vision 2030.

(Source: UN)

By John Lee.

On Wednesday 24 July, Khaled T. Kanaan, Chairman of the Jordan Iraqi Economic Association (JIEA), met with HE Mr. Ali Mohsen Al-Alaq, Governor of the Central Bank of Iraq (CBI).

The meeting was a follow-up to the “Digital Transformation in Financial Sector Forum” held in Baghdad on 10 July, which was jointly organized between the JIEA and the Iraq Private Banks League (IPBL), supported by the International Finance Corporation (IFC) of the World Bank Group.

The meeting addressed the CBI strategy to move forward with their drive towards digital transformation in the financial sector.

The JIEA conveyed the message that Jordanian fintech firms will be more than ready to engage in any effort that will assist the Iraqi side in their drive.

(Source: Jordan Iraqi Economic Association)

By John Lee.

The Trade Bank of Iraq (TBI) has announced a loan of 1 trillion Iraqi dinars ($843 million) to the state-run Grain Board of Iraq, which is affiliated to the Iraqi Ministry of Commerce.

According to a press release, the loan is an effort to help Iraqi farmers for clear their dues and payments in accordance with the announcement made by the Iraqi Prime Minister recently under the government’s strategy aimed to support the Iraqi economy.

This initiative, which supports the agricultural sector, is aimed at enhancing production capacity and contributing to the sustainable development of the sector, which is a fundamental pillar of the Iraqi economy.

(Source: TBI)

On July 19, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Iraq.

An improved security situation and the recovery in oil prices have improved near-term vulnerabilities. Large fiscal and current account surpluses—around 8 and 6 percent of GDP, respectively—were recorded in 2018, allowing the government to retire domestic debt and accumulate fiscal buffers. Gross international reserves reached $65 billion by end-2018.

However, post-war reconstruction and economic recovery have been slow. Non-oil GDP rose by only 0.8 percent year-on-year in 2018 in a context of weak execution of reconstruction and other public investment. Overall GDP contracted by around 0.6 percent as oil production was cut to comply with the OPEC+ agreement.

The 2019 budget implies a sizable fiscal loosening that will reverse the recent reduction in vulnerabilities. Current spending is expected to increase by 27 percent year-on-year, in part due to a higher public sector wage bill, while revenues will be dampened by the abolition of non-oil taxes. As a result, the budget is projected to shift to a deficit of 4 percent of GDP in 2019, and reserves are projected to decline.

The fiscal and external positions are expected to continue to deteriorate over the medium term absent policy changes—with reserves falling below adequate levels and fiscal buffers eroded. Although the level of public debt will remain sustainable, gross fiscal financing needs will increase. Non-oil GDP growth is projected to reach 5½ in 2019 but subside over the medium term.

In a context of highly volatile oil prices, the major risk to the outlook is a fall in oil prices which would lower exports and budgetary revenues, leading to an even sharper decline in reserves or higher public debt. Geopolitical tensions, the potential for social unrest in a context of weak public services and lack of progress in combatting corruption pose further risks.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They were encouraged by the recent strengthening of Iraq’s economy but recognized that the country continues to face daunting challenges. Social conditions remain harsh, post-war reconstruction progress is slow, development needs are large, and institutional weaknesses are significant. Volatile oil prices and a difficult regional and geopolitical environment pose additional difficulties.

Directors encouraged the authorities to seize the opportunity presented by the improved security situation and higher oil prices to implement policies and structural reforms aimed at ensuring macroeconomic and financial stability, tackling long-standing social problems, and promoting sustainable and inclusive growth.

Directors emphasized that building a robust fiscal framework is essential to maintain fiscal and macroeconomic stability and strengthen buffers. They encouraged the authorities to adopt a risk‑ and rules-based approach to fiscal policy as part of broader reforms to manage oil revenue more effectively, reduce tendencies for procyclicality, and shift to a more growth-friendly composition of expenditure. Directors supported scaling up reconstruction and development expenditure gradually in line with improving absorptive capacity.

They underscored the need to strengthen public financial management to ensure public spending is appropriately monitored and to reduce vulnerabilities to corruption. In this context, Directors welcomed the newly adopted General Financial Management Law and encouraged its full implementation.

Directors emphasized that gradual fiscal adjustment, including containing current primary spending and boosting non-oil revenues is essential for maintaining fiscal and debt sustainability. They recommended that spending measures should give priority to containing the growth in wage bill and lowering subsidies to the electricity sector. Directors emphasized that the poorest and the most vulnerable must be protected from the adjustment process.

Directors underscored that an overhaul of the banking sector is necessary to maintain financial stability. They encouraged the authorities to restructure the large state-owned banks, enhance their supervision, and implement other reforms to increase financial intermediation. Directors highlighted the benefits of increasing financial inclusion, especially for the SME sector, which has a large potential to absorb entrants to the labor market.

Directors agreed that building public institutions and enhancing governance is key for success, and highlighted the scope for Fund capacity development to support these efforts. They welcomed progress in developing an anti-corruption framework and called for further modifications to the legal regime for combatting corruption coupled with stronger coordination between the relevant government agencies, while continuing to strengthen the framework for Anti-money laundering and combatting the financing of terrorism (AML/CFT). Directors also recommended strengthening Public Investment Management framework to ensure that spending is well directed and that donor funds targeting reconstruction are put to the most efficient use.

Directors looked forward to continued close engagement between the authorities and the Fund in the context of post program monitoring.

 

Iraq: Selected Economic and Financial Indicators, 2015–24

(Percent of GDP, except were indicated)

Projections
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Economic growth and prices
Real GDP (percentage change) 2.5 15.2 -2.5 -0.6 4.6 5.3 2.6 2.3 2.1 2.1
Non-oil real GDP (percentage change) -14.4 1.3 -0.6 0.8 5.4 5.0 4.1 3.4 2.7 2.7
GDP deflator (percentage change) -26.1 -13.4 14.6 15.4 -4.5 2.3 2.6 2.8 3.1 3.3
GDP per capita (US$) 5,047 4,843 5,263 5,882 5,728 6,017 6,172 6,326 6,486 6,666
GDP (in ID trillion) 207.2 206.7 231.0 265.0 264.8 285.4 300.4 315.9 332.3 350.4
Non-oil GDP (in ID trillion) 137.3 138.3 140.8 145.6 158.1 173.2 188.1 202.8 217.1 232.6
GDP (in US$ billion) 177.7 175.2 195.5 224.2 224.1 241.5 254.1 267.3 281.1 296.5
Oil production (mbpd) 3.72 4.63 4.47 4.41 4.59 4.84 4.93 5.01 5.10 5.18
Oil exports (mbpd) 3.35 3.79 3.80 3.86 4.03 4.25 4.33 4.40 4.47 4.55
Iraq oil export prices (US$ pb) 1/ 45.9 35.6 48.7 65.2 56.0 55.8 54.9 54.4 54.4 54.8
Consumer price inflation (percentage change; end of period) 2.3 -1.5 0.2 -0.1 2.0 2.0 2.0 2.0 2.0 2.0
Consumer price inflation (percentage change; average) 1.4 0.5 0.1 0.4 0.8 2.0 2.0 2.0 2.0 2.0
National Accounts
Gross domestic investment 24.9 20.8 16.7 12.9 18.8 16.7 16.0 15.6 15.6 15.4
Of which: public 15.6 11.5 8.3 5.3 10.6 8.4 7.5 7.0 6.8 6.6
Gross domestic consumption 81.2 87.0 80.8 79.1 84.5 85.4 86.8 87.9 88.6 89.6
Of which: public 22.6 22.6 21.8 21.2 26.5 26.3 26.4 26.2 26.2 26.3
Gross national savings 18.4 12.5 18.6 19.8 13.6 12.5 11.7 11.1 10.3 9.4
Of which: public 3.1 -2.0 7.0 13.4 6.5 5.2 4.1 3.2 1.8 0.8
Saving – Investment balance -6.5 -8.3 1.8 6.9 -5.2 -4.2 -4.3 -4.6 -5.3 -6.0
Public Finance
Government revenue and grants 30.6 26.8 33.0 39.8 40.5 39.6 37.9 36.5 35.5 34.6
Government oil revenue 27.8 22.9 28.9 36.7 37.2 36.3 34.5 33.1 32.0 31.0
Government non-oil revenue 2.8 4.0 4.2 3.1 3.3 3.3 3.4 3.4 3.5 3.5
Expenditure, of which: 43.4 40.7 34.6 32.0 44.6 43.1 41.2 40.5 40.5 40.5
Current expenditure 27.8 29.3 26.4 26.7 33.9 34.7 33.6 33.5 33.7 33.9
Capital expenditure 15.6 11.5 8.3 5.3 10.6 8.4 7.5 7.0 6.8 6.6
Overall fiscal balance (including grants) -12.8 -13.9 -1.6 7.9 -4.1 -3.5 -3.3 -4.0 -5.0 -5.9
Non-oil primary fiscal balance, accrual basis (percent of non-oil GDP) -46.5 -43.3 -39.4 -42.4 -56.9 -52.1 -49.2 -47.1 -46.2 -45.3
Adjusted Non-oil primary fiscal balance, accrual basis (excl. KRG, percent of non-oil GDP) 2/ -44.7 -43.3 -39.4 -40.5 -50.1 -46.0 -43.6 -41.8 -41.0 -40.2
Adjusted non-oil primary expenditure (excl. KRG, percent of non-oil GDP) 3/ 48.9 49.2 46.3 46.2 55.6 51.5 49.1 47.2 46.3 45.5
Adjusted non-oil primary expenditure (excl. KRG, annual real growth, percent) 3/ -24.7 0.9 -4.5 2.8 29.9 -0.6 1.4 1.6 3.1 3.2
Memorandum items
Total government debt (in percent of GDP) 4/ 56.2 64.2 58.9 49.3 51.4 50.5 50.6 51.5 53.6 56.4
Total government debt (in US$ billion) 4/ 99.9 112.5 115.2 110.4 115.3 121.9 128.5 137.5 150.7 167.3
External government debt (in percent of GDP) 37.2 37.1 35.6 30.6 32.2 31.5 30.5 28.4 26.8 24.9
External government debt (in US$ billion) 66.1 65.0 69.5 68.7 72.2 76.2 77.6 75.8 75.3 73.8
Monetary indicators
Growth in reserve money -12.0 9.2 -4.4 6.7 2.5 5.4 4.7 4.9 5.1 4.6
Growth in broad money -9.1 7.1 2.6 2.7 2.5 6.2 5.4 6.0 5.9 5.3
External sector
Current account -6.5 -8.3 1.8 6.9 -5.2 -4.2 -4.3 -4.6 -5.3 -6.0
Trade balance -0.1 -1.7 7.6 13.4 3.5 4.1 3.2 2.0 1.3 0.5
Exports of goods 31.8 28.6 34.8 41.2 37.0 36.2 34.4 33.1 32.0 31.2
Imports of goods -31.9 -30.3 -27.1 -27.8 -33.5 -32.0 -31.2 -31.1 -30.8 -30.7
Overall external balance -6.7 -3.7 2.5 6.3 -2.5 -1.1 -1.6 -3.5 -3.8 -4.7
Gross reserves (in US$ billion) 54.1 45.5 49.4 64.7 57.2 53.5 48.5 38.8 28.2 14.3
Total GIR (in months of imports of goods and services) 9.3 7.8 7.3 8.0 6.8 6.2 5.5 4.2 2.9 1.4
Exchange rate (dinar per US$; period average) 1,166 1,180 1,182 1,182 1,182 1,182 1,182 1,182 1,182 1,182
Real effective exchange rate (percent change, end of period) 5/ 6.5 1.8 -5.1 4.9
Sources: Iraqi authorities; and Fund staff estimates and projections.

1/ Negative price differential of about $3.6 per barrel compared to the average petroleum spot price (average of Brent, West Texas and Dubai oil prices) in 2018-23.

2/ Adjusted to exclude (i) full year estimates of federal government transfers to the Kurdistan Regional Government, and (ii) non-oil tax revenues from the KRG to the federal government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

3/ Adjusted to exclude full year estimate of federal government transfers to the Kurdistan Regional Government. In 2014 and 2015, actual transfers were made for only 2 and 5 months, respectively.

4/ Includes arrears. The debt stock includes legacy arrears to non-Paris Club creditors on which the authorities have requested (but not yet obtained) Paris-Club comparable relief. Implementing comparable terms will substantially reduce debt (e.g. by 15 percent of GDP in 2017).

5/ Positive means appreciation.

 


[1] Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

(Source: IMF)