Last week the Central Bank of Iraq (CBI) announced that it was authorizing the two largest state-owned banks, Rafidain Bank and Rashid Bank, to sell US dollars at auction. The CBI’s goal is to reduce the spread between its own auction rate and the unofficial “street” exchange rate, which has recently been as wide as seven percent. The CBI expects the spread to narrow to four percent initially and eventually to reach two percent as the unofficial rate strengthens. (See this story from Alsumaria and the “Economics” section of last week’s Rabee Securities Weekly Bulletin.)
A five percent strengthening in the street rate might not sound like much. But the CBI is doing more than just narrowing the spread. It is also eliminating uncertainty about the future direction of the dinar by signaling that no further deprecation will be tolerated.
This move is positive for Iraqi stocks because a stronger currency will increase the expected value of the IQD-denominated earnings of the listed companies relative to the return on USD assets. The increased supply of US dollars may also push up earnings at the listed banks by allowing them to expand their offerings of USD products such as letters of credit.
While you’d never guess it from the market’s tepid reaction to the news, the CBI has given investors yet another reason to be long the ISX.