Despite being plagued by armed conflict for most of the last decade, Iraq’s economy is rebounding and showing promising signs for surging growth in the future. Iraq is an enormously wealthy country, devastated by over 30 years of terrible conflicts and crippling sanctions, and almost torn apart by civil strife.
Energy lies at the heart of the Iraq investment story, and the country is home to the world’s 5th largest proven oil reserves (143 billion barrels), as well as the 13th-largest proven gas reserves. However, much of Iraq is underexplored, especially in comparison to major oil producers in the region, and industry estimates suggest it could have an additional 100-150 billion barrels of reserves. Iraq’s oil industry is extremely competitive, with the lowest extraction costs in the world at around USD 5 a barrel.
The development of these resources can fuel its social and economic development in the next few years. This is in addition to the wholesale reconstruction of the country whose infrastructure was destroyed or at best deteriorated following the traumatic events of the last 30 years. The petroleum-rich nation has attracted investment not only from US companies, but also from firms in South Korea and China, which invested USD 12 billion and USD 3 billion respectively in Iraq in 2012.
Since 2003, Iraq’s GDP growth has been driven by the rehabilitation of the oil sector, and the country hit a 30 year high for both production and exports in February 2014. The size of Iraq’s economy has increased from around USD 50 billion in 2005 to USD 138 billion in 2010 and is expected to be USD 232 billion by the end of 2014. Growth in the future will also be supported by Iraq’s domestic population, which currently stands at 35.9 million. The favorable demographics will enhance the development of the economy given that the population is growing at 3% per annum and more than half the population is under the age of 25.
Iraq, however, faces many challenges before it can begin to achieve its potential. In the last 10 years, since the invasion in 2003, there have been issues stemming from the disastrous policies of the prior government which deepened civil strife and created divisions within the country that led to the disintegration of the Iraqi army and loss of territory to ISIL.
Even with ongoing challenges, Iraq’s improving security situation and foreign investment in its energy sector will contribute to developments in infrastructure, telecommunications, and transportation. Additional sectors garnering the attention of investors are consumer goods and real estate, as the country faces a major housing shortage
Stock Market:
The Iraq Stock Exchange (ISX) is located in Baghdad and launched operations in 2004 (it opened to foreign investors in 2007). The ISX is a self-regulatory organization and is governed by the Iraqi Securities Commission (ISC) which was modeled on the US’s SEC. The exchange operates an electronic trading platform provided by NASDAQ-OMX and the ISX currently lists 82 companies in a variety of industries including financial services, construction, agriculture, hotels and food processing. Total market capitalization was USD 8.0 billion as of November 2014 and the market cap to GDP ratio is under 4%. This is significantly lower than countries in the MENA region which have the same ratio at levels between 25%-90% which highlights the scope of potential developments for Iraq’s capital markets over the coming years.
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Unless you have been living under a rock in 2014, you are well aware of the negative international media attention that Iraq has garnered due to the rise of the Islamic State of Iraq and the Levant (ISIL). Public outrage and stern condemnations have been issued to ISIL by the United States, specifically in response to several grisly beheading videos that shook the Western perception of a military campaign that was “out of sight, out of mind” to its core. Sadly for Iraq, ISIL is just the latest reason why the country has found itself perpetually in the news, and although the civil war in Syria has dominated headlines for several years, much of the violence, sectarian strife, and political instability in Iraq has continued unchecked.
To have a positive outlook on Iraq, you either need to know the underlying story very well or you need to dig deep for signs of progress.
The underlying story is that despite the violence and instability, Iraq is quietly undergoing an economic revival thanks to its resurgent oil sector and growing interest in the country from foreign corporations. Some of this progress slowed with the sudden rise of ISIL in 2014, but the fundamental opportunities remain the same: Iraq is estimated to have the world’s 5th largest oil reserves, roughly 140 billion barrels, and production reached 3.6 million barrels per day (bpd) in February, a 30-year high. Even with the threat of ISIL looming, Iraq produced 3.4 million barrels per day (bpd) in November, which was an increase of 100,000 bpd over October and makes the country the second largest oil producer in OPEC after Saudi Arabia. Much of the increase in production can be attributed to increased Western investment (Iraq has recently signed drilling and exploration contracts with numerous international energy companies including Exxon-Mobil, BP, Shell, and Total), as well as superior US drilling equipment that was previously unavailable for decades due to the crippling sanctions that were levied against the country in the era of Saddam Hussein. Although global oil prices have experienced a sharp decline in recent months, Iraq’s reserves are estimated based on seismic data from decades ago, and geologists estimate that unexplored regions of the country may contain even greater deposits.
Iraq’s aggressive ramp-up in output can be attributed to the country’s Integrated National Energy Strategy (INES), developed in 2013 in cooperation with The World Bank and Booz & Company. The plan laid out an ambitious goal to significantly ramp up production, which now is expected to reach 5-6 million bpd by 2020 and to meaningfully grow beyond this by 2030. To hit its output targets, the INES projects that Iraq will need a whopping USD 620 billion (nearly 3x Iraq’s 2013 GDP of USD 223 billion) invested in its oil and gas-related industries through 2030. Despite the magnitude of investment required, the INES also sees a huge potential payoff, forecasting that Iraq’s oil and gas industries could generate roughly USD 6 trillion for the country before 2030, although the forecasts are based on an estimated price of USD 100 per barrel.
Despite the huge oil reserves, Iraq and Kurdistan have squabbled for years over how to settle the distribution of oil revenues from Kurdistan, as the Kurds feel neglected by the central government in Baghdad in not receiving their full 17% allocation of Iraq’s budget – Kurdistan has traditionally received only 12% of the government budget. In recent years, Erbil, Kurdistan’s capital, has triggered outrage in Baghdad by spurning the central government and unilaterally signing agreements with international oil companies. Kurdistan also increasingly became cozy with Turkey, a regional heavyweight that relies on oil imports. Kurdistan has moved forward with plans for two pipelines to export crude via Turkey, bypassing Baghdad. Construction on the first pipeline, which will connect to an existing pipeline with a capacity of 1.5 – 1.6 million bpd, has now been completed and there are plans to build a second oil pipeline to Turkey within the next two years with a capacity of 1 million bpd.
But one major sign of progress for Iraq in settling its ongoing dispute with Kurdistan occurred on December 2nd, when the Iraqi government announced that it had reached a long-term agreement with the autonomous Kurdish region to share both oil revenues and military resources. The deal is a potential game-changer and will help fast track increased oil production, foster renewed stability, and boost economic growth in the country.
The agreement stipulates that Kurdistan will receive its full allocated 17% of the Iraqi national budget, which is mostly funded by revenues from oil sales, in exchange for Kurdistan agreeing to sell 550,000 bpd through the Iraqi government’s marketing arm, the State Owned Marketing Organization (SOMO). Previously, Kurdistan had been circumventing Baghdad and negotiating its own independent, more lucrative contracts with international oil companies (IOCs). This infuriated the Iraqi central government, which declared such contracts illegal and, with the United States’ support, attempted to pursue any international buyers who might buy directly from the Kurdistan Regional Government (KRG) through legal action and threatened to punish them by excluding them from drilling Iraq’s southern oil fields. The result of the ongoing profit-sharing dispute is that many IOCs in Kurdistan have not been paid, which has hindered additional exploration and investment in Kurdistan. The dispute had also sidelined the passage of a hydrocarbon law in Iraq, which further held back investment in the country’s oil industry.
The implications of the deal are significant, because the agreement signals that the Iraqi federal government accepts the legality of the KRG’s previously negotiated oil deals, as well as the KRG’s right to manage production in Kirkuk, which has long been a source of dispute. From Iraq’s standpoint, the agreement signifies that Kurdistan agrees to work with the marketing monopoly of SOMO. Ironing out the differences and reaching an agreement removes the biggest uncertainty for IOCs, and the move will likely usher in a new wave of oil and oil-related investment and capital expenditure spending. The agreement could also contribute to the development of similar deals by other oil-producing regions such as Basra, the source of most of the country’s southern fields.
The other reason why the accord is significant is because the deal mandates that the KRG will receive USD 1 billion in military aid to pay, train, and equip its fighting force, the peshmerga, to fight ISIL. The funding will be provided directly by the central government in Baghdad from the state defense budget, and will continue be funded from the state budget in the future. This economic boost to Kurdish forces will strengthen Iraq’s arsenal against ISIL and will considerably help efforts to maintain Iraq’s stability and reduce the vulnerability of Kurdistan to ISIL’s advances and seizure of territory.
Two emerging factors contributed to the necessity for both Iraq and Kurdistan to get the deal done. One factor is the growing threat of advances by ISIL, which seeks to establish an Islamic caliphate and is waging war against both sides. The second motivating factor has been the slump in the global oil market sparked in October when Saudi Arabia unilaterally cut oil prices, sending the commodity’s price into a downward spiral. As both Iraq and Kurdistan are heavily reliant on oil exports as a source of cash, the lower global oil prices have forced both sides to tighten their belts and incentivized them to increase production to boost revenues.
Although the deal between the Iraqi government and the Kurdistan Regional Government (KRG) should be applauded by international observers, oil-producing countries and OPEC member states were likely worried about the timing of the deal. With global oil prices currently depressed and an estimated oversupply of 1.8 million barrels per day, the recent deal will add roughly 300,000 barrels per day to world supplies. After the announcement of the agreement, Benchmark Brent crude fell 2.8% to USD 70.54 per barrel.
Regardless of where global oil prices are headed, the recent agreement between Iraq and Kurdistan should be seen as a positive harbinger, and we remain bullish on the long-term potential of Iraq due to the country’s incredible oil wealth, the resilience of its population, and the strengthened opposition to the security threat of ISIL.
In line with our process of being on the ground in the countries we invest in, AFC’s CIO of Iraq investments, Ahmed Tabaqchali, recounts some of his experiences from Iraq and the country’s development over the past several decades.
As an Iraqi national who has lived, studied, and worked throughout the world over the last 55+ years, I feel that I can bridge my two homes – Iraq and the West – and in the process, show you a glimpse of the astonishing opportunities that Iraq presents to long-term investors. Consider this travel report a running commentary on both the country of Iraq and its people.
Since June of this year, global media reports on Iraq have been full of images of barbarism and medieval cruelty perpetrated by the so-called ISIS (its Arabic name is the Islamic State of Iraq and Sham – in Arabic, Sham stands for greater Syria, which loosely covers Syria, Lebanon, and parts of Palestine and Jordan). Sadly, this gruesome news coverage has become a recurring theme for Iraq, with almost daily news of bombings and violence, as the chart below, published by the BBC, depicts.
Although horrific and true, the news reports tend to discuss Iraq in aggregate and do not reflect conditions in the country’s different regions, nor do they truly reflect the other side of life in Iraq as experienced by Iraqis on a daily basis.
Iraqi Kurdistan, known as the Kurdish Region of Iraq (KRI), is an oasis of calm and fast becoming a bustling business hub. The KRI has been semi-autonomous since the 1990’s and had its independence enshrined in the Iraq constitution after 2003 and is governed by the Kurdish Regional Government (KRG). Erbil, the capital of Iraqi Kurdistan, is experiencing an oil boom and is billing itself as a “new Dubai”. Any traveler who saw Dubai in the 90’s would likely agree with this comparison: Erbil’s new USD 500+ million airport is run by the same group that manages Dubai’s airport and the city’s existing 5-star hotels are filled to capacity with Western businessmen, with new hotels being planned by Hilton, Sheraton, and Marriot. The capital boasts shiny new malls, BMW and Mercedes car dealerships, and numerous luxury apartments being financed and operated by regional players in the Gulf Cooperation Council (GCC) that have experience developing similar projects in Dubai, Abu Dhabi, and Doha. This newfound wealth can be seen across Kurdistan’s other major cities as well such as Sulaimaniyah and Dahouk.
Other parts of Iraq have also experienced development, but it has not been as uniform as in Kurdistan. Baghdad, Iraq’s capital, has been the scene of most of the country’s bombings and violence, and is a mosaic of both destruction and prosperity. Shopping malls with interiors that mirror those in Dubai and sell everything under the sun are springing up everywhere, but the malls are often surrounded by bombed-out buildings and located on roads filled with concrete blast walls and roadblocks. This contrast is everywhere in Baghdad – scenes of destruction bump up against popular new cafes and restaurants, many of which are full to capacity, as sociable Iraqis carry on with their lives as normal.
Nowhere is the rise in prosperity more evident than in Iraq’s hotels, which are being renovated and are attracting international partners. This growth is reflected in the country’s stock market, with the poster child of the group, Babylon Hotel, returning 76% in 2013 and rallying a further 100% by early June of this year before declining 29% by the end of November following ISIL’s takeover of Mosul. Nevertheless, the stock is still up 50% YTD. The Iraq Stock Exchange (ISX)-listed hotel group has a market capitalization of USD 405 million as of the end of November, and accounts for 5.1% of the ISX’s market cap. The group’s earnings are negligible, and thus earnings multiples are eye-watering. But the performance of Babylon Hotel may be the first sign of the huge potential recovery slated to take place in Iraq. Only time will tell…
Another area that has seen growth is real estate. Baghdad’s property prices have been rising significantly over the last couple of years, as rising prosperity and limited supply in the capital have led to an uptick in prices. One such play is a listed real estate investment company, Mamuora Real Estate Company, which after a modest 8.5% rise in 2013, rallied 36% through May before declining 30% following the events of the fall of Mosul. However, this drop did not last, with the stock recovering 32% from its lows to end at a gain of +25% YTD.
| As of 30/11/2014 | Market Cap (USD million) | % of Market cap | |
| Banking | 3,965 | 50.19% | |
| Telecommunication | 2,929 | 37.08% | |
| Hotel | 405 | 5.13% | |
| Industrial | 396 | 5.01% | |
| Services | 124 | 1.57% | |
| Agricultural | 59 | 0.75% | |
| Insurance | 14 | 0.18% | |
| Investment | 8 | 0.10% | |
| Total market | 7,901 | ||
| L12M avg daily turnover $ mn | 1.0 | ||
| Source: Iraq Stock Exchange | |||
In terms of the national psyche, Iraqis are a hardy and resilient bunch who are determined to enjoy what life has to offer despite having suffered through over 30 years of terrible wars, crippling sanctions, and almost seeing their country torn apart by civil strife. Iraqis today are opening up to the world and eager to enjoy the consumer goods, technology, and services that have rapidly spread around the globe. This trend has been supported by sharply rising personal income, with GDP per capita roughly in line with the Middle East’s non-oil producing countries such as Jordan and Egypt, but significantly lagging oil producers like Saudi Arabia and Qatar.
| GDP Data | 2010A | 2011A | 2012A | 2013E | 2014P | 2015P | 2016P | 2017P | 2018P |
| Nominal GDP (USD bn) |
138.5 | 185.8 | 216.0 | 229.3 | 232.2 | 240.0 | 260.7 | 280.0 | 304.8 |
| Real GDP change % |
5.5% | 10.2% | 10.3% | 4.2% | -2.7% | 1.5% | 7.6% | 6.7% | 7.7% |
| Population (m) | 31.7 | 32.7 | 33.7 | 34.8 | 35.9 | 37.0 | 38.1 | 39.2 | 40.3 |
| Nominal GDP Per Capita (USD) |
4,374 | 5,687 | 6,410 | 6,594 | 6,474 | 6,491 | 6,844 | 7,142 | 7,555 |
Much of Iraq’s infrastructure was destroyed during the 30 years of conflict and the infrastructure that wasn’t destroyed has suffered from lack of upkeep and maintenance. The fact that Iraq’s oil industry, roads, power lines, and bridges have functioned at all is a testament to the ingenuity of Iraqis. One such casualty was Iraq’s fixed telephone line network, with currently fixed line penetration around 6%. However, Iraqis quickly adopted mobile phones, which were forbidden prior to 2003, with enthusiasm, and currently mobile penetration stands at over 80%. Iraq is served by 3 GSM operators with country-wide licenses. Thus far, the operators have only been able to offer 2G, with the result that the huge demand for online access has been satisfied by several expensive fixed line networks. The shortage of internet bandwidth continues, with an estimated 10% of Iraqis having internet access. The attractiveness of this opportunity for operators was demonstrated in November, when Iraq’s three mobile operators, Zain Iraq (a unit of Kuwait’s Zain), Asiacell (a subsidiary of Qatar’s Ooredoo), and Korek (an affiliate of France’s Orange Telecom) each made the first installment of USD 73 million out of a total of USD 307 million each to boost radio spectrum in order to offer 3G services in the country. The significance of this can only be appreciated by noting that the three operators each paid USD 1.25 billion in 2007 for a 15-year technology neutral GSM license (including 3G). As such, the USD 307 million sum is only for the extra spectrum enabling 3G for the remaining eight years of this license. The operators expect to offer 3G in early 2015, which should ultimately lead to huge growth in smart phone usage and internet services.
Iraq is still primarily a cash economy, and over 80% of Iraqis do not have bank accounts. The Iraqi banking system is dominated by state banks, which account for 90% of the banking system assets and 86% of deposits. Such assets and deposits mostly reflect those of state owned enterprises, which dominate the non-oil economy and are barred from using private sector banks. Most small and medium-sized enterprises (SMEs) and small businesses still rely on self-financing from family and friends. Moreover, overall private sector usage of the banking system relies mostly on state banks for deposits and loans. Private sector deposits are at 9% of GDP vs about 70% in the region, with 40% of these or 3.6% of GDP with the private banks. Loans, ex-trade financing such as LC’s or LG’s, are at 6.5% of GDP (2013 figures) with only 39% of those, or 2.5% of GDP with private banks, which compares to around 55% for regional comparables. The implications of low banking penetration compounded by the tiny share of private sector banking are that there are potentially massive growth opportunities for private sector banking as banking usage and credit expansion takes hold in Iraq. This movement from cash-based economies to banked economies has unfolded across the world, in post-conflict countries or countries with no previous banking culture.
Other areas of growth in banking and banking-related usage, such as credit and debit cards, will undoubtedly take place in Iraq over the next few years. ATMs in Iraq are currently located inside bank branches due to security issues. Additionally, the lack of a national switching system means that customers cannot use other banks’ ATMs, and thus World Bank figures of 1 ATM per 100,000 people overstates the true ATM penetration by orders of magnitude. Many other countries in the region have over 30x more ATMs per person than Iraq does!
I will end this travel note, for now, with an image of Scheherazade and King Shahryar that has a deep significance to modern Iraqis.
The story of Scheherazade, a legendary Persian queen and the storyteller of One Thousand and One Nights is representative of a history of survival through decades of horrors that the Iraqi spirit has endured. The statue of her was created in 1972 by Mohmmed Hikamt, who portrayed her as a strong woman commanding attention and representing the new women of Iraq that were taking up an active role in society. Her story provides a link between Iraq and the West, and the cultural mixing of these two factions has been expressed in the music of Rimsky Koriskove. She stands as a symbol of what Baghdad was and, one day, will become again – open, exciting, full of hope, and secularly building towards the future.
Source – AsiaFrontierCapital.com
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