By Mark DeWeaver.

Another roller coaster year for the ISX is drawing to a close. By the middle of May, the Rabee Securities RSISX index had fallen 24% from its early October 2011 peak. Since then, the market has staged a dramatic rebound. As of December 8, the index was down just 3% from the October high and up 8% for the year.

This rebound is all the more remarkable because it has occurred in the absence of any pick up in foreign participation. In 2011 foreigners were net buyers in 97% of the trading weeks with a share of monthly volume that exceeded 10% in all but three months. This year, foreign net buying has fallen sharply. (See chart.) Foreigners have been net sellers in about 40% of the trading weeks so far. Their monthly-volume share has exceeded 6% in only two months. (See the latest Rabee Securities Weekly for a nice chart of the foreign share of monthly volume.)

There is also no obvious catalyst for fresh inflows of foreign money at this point. While the regulators have finally decided to offer custodian bank licenses, HSBC has apparently lost interest in providing share custody in Iraq and no one else has stepped up to take its place. (See this post for more on the custody issue.) EFG-Hermes also seems to have suspended its swaps program, shutting down another potential channel through which institutional investors might have accessed the market. (There’s more on the EFG swaps here.) Even the much-vaunted Asiacell IPO, which I once thought might at last put the ISX on foreign fund managers’ radars, now appears to be targeted mainly at local individuals.

This failure to attract outside money is not the end of the world, however. When the right economic fundamentals are in place, emerging markets can easily go up without foreigner investors. Think of the largely closed Chinese and Saudi markets for example. Or Kuwait’s infamous Souk al Manakh, which rose to such dizzy heights in 1982 that it was briefly the third largest market in the world after the US and Japan.

For the ISX to keep going up, problems like share custody don’t really need to be solved. The important thing is for the Iraqi economy to stay on its current high-growth trajectory. As long as the listed companies’ earnings are growing at double digit rates and local investors are flush with cash there’s really no reason why this year’s home-grown rally shouldn’t continue into 2013.

• Prime Minister Nouri al-Maliki endorses and supports event.
• High-level delegation from several ministries and headed by deputy prime minister.
• Financing of Iraq’s reconstruction to be discussed with international banks and investors.

Iraq is to welcome foreign investors at a major London convention and offer a stake in the country’s economic and financial future.

The major investment conference for Iraq will get underway in London next week from 17-18 September (www.iraqfinance.co.uk).

A high-level delegation, endorsed by Iraq’s prime minister, Nouri al-Maliki, and led by the deputy prime minister, Rowsch Shaways (pictured), will be welcomed by the UK minister of state for trade and investment, Lord Green, at London’s Grange Tower Bridge Hotel.

“Iraq is embarking on a major redevelopment programme and all government departments are preparing for huge growth and expansion,” said Shaways. “The aims and objectives of Iraq Finance 2012 complement the urgent needs and reforms required across the country.”

The delegation will discuss Iraq’s investment requirements and key opportunities for regenerating the country’s financial sector. Iraqi ministers and government officials are expected to call upon the support of the international community to help in financing Iraq’s reconstruction.

It is also a chance for foreign investors to discover the massive financial potential in a stabilized Iraq. The country is already emerging as a major center for international investment following its long isolation from world markets. Major opportunities exist across several industries if the appropriate financing and domestic banking sector is fully established.

Iraq will use the conference to present its ideas for PPP and project financing, as well as a series of reforms and investments for its banking sector, including the restructuring of state banks.

The event has already attracted widespread investor attention. Leading investment and private banks are taking part together with IOCs, technology companies, insurance providers, and other financial institutions, all hoping to capitalize on the reconstruction of Iraq’s physical and financial infrastructure.

Haider al Abadi, Chairman of Iraq’s Parliamentary Finance Committee said: “This conference will contribute to the existing work of the committee by exploring mechanisms for regenerating the financial sector through active participation and dialogue with international clients, as well as to address any immediate and long term needs for reform.”

To register or enquire about a media pass for Iraq Finance 2012, being held at the Grange Tower Bridge Hotel, London, 18 – 19 September, contact the organisers on info@symexco.com or call +44 (0) 208 849 8964.

Event: Iraq Finance 2012 – international conference on finance and banking in Iraq

Date: Tuesday 18 – Wednesday 19 September 2012

Venue: The Grange Tower Bridge Hotel

Website: www.iraqfinance.co.uk

Key Confirmed Attendees and Speakers:

1. H.E Dr Rowsch Shaways, Deputy Prime Minister
2. H.E Dr Qusayl Al-Suhail, First Deputy President of Parliament
3. H.E Dr Rafe Al Essawi, Minister of Finance
4. H.E Dr Sinan-al-Shabibi, Central Bank Governor
5. H.E Dr Ali Yusuf Al Shukri, Minister of Planning and Development
6. H.E Eng. Mohammed Al-Darraji, Minister of Construction & Housing
7. H.E Dr Sami Al-Araji, Chairman, National Investment Commission
8. H.E Dr Haider Al-Abadi, Chairman, Parliamentary Finance Committee
9. Hamdiyah-al-Jaff, Chairman and President, Trade Bank of Iraq

Earlier this month, the Iraq Securities Commission (ISC) announced that it would be moving against violations of its Regulation 16, which covers insider trading. Effective July 1, the Commission threatened to bar violators from trading and to cancel their trades.

Regulation 16 defines insiders as including members of a company’s board of directors and their advisors, upper-level managers, auditors, and others with knowledge of “substantial events” that may “affect the stock price upon their announcement.” Insiders are prohibited from trading prior to the announcement of results and other potentially market-moving news and from leaking insider information before it is made public.

The ISC’s renewed focus on this issue is part of a wider effort to bring the ISX closer to international best practices. (See this post.) It is also a logical complement to recent rule changes that have shortened the suspension periods for companies having capital increases. Where the former approach seems to have been to prevent insider trading by suspending trading altogether, there now appears to be an effort to prevent insider trading by taking aim at the insiders themselves.

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• Rosneft rumored to be in talks with Exxon: Exxon reduces exposure as pressure ratchets up on Maliki.
• Eventful week for Iraq shows bifurcation of oil and gas industry: Both Erbil and Baghdad continue to make healthy progress as their oil development moves in different directions.

Headlines:

• Gorran objects to KRG budget: Reminder that Kurdish dissent exists and could affect effectiveness in face of Baghdad.
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• June 24 – Parliament [finally] returns from 7 week break

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The Central Bank of Iraq’s June 30 deadline for private-sector banks to raise capital to IQD 150 billion is fast approaching. Yet of the 21 ISX-listed lenders only three—North Bank (BNOR), United Bank (BUND), and Kurdistan Bank (BKUI)—have reached the target so far.

Rabee Securities’ most recent bank sector report found that as of June 15 another five—Bank of Baghdad (BBOB), Iraqi Middle East Bank (BIME), Al Mansour Bank (BMNS), Elaf Islamic Bank (BELF), and Dijlah and Furat Bank (BDFD)—will be in compliance once their planned capital increases are completed. This leaves another 13 banks with no clear plan to raise the required funds.

Ordinarily, institutions that fail to meet capital adequacy standards risk being taken over by the government and put into receivership. This was the fate of Warka Bank, for example. But such a penalty seems unwarranted in this case.

IQD 150 billion is, after all, an arbitrary goal. If anything, Iraqi banks typically have too much capital relative to the size of their loan books. The fact that they have not yet satisfied the central bank’s requirement does not imply that they are at risk of failure.

The obvious choice for the central bank is simply to give them more time, just as it did at the end of 2010. That was the original deadline for the CBI’s initial bank-capital target of IQD 100 billion. When a number of banks fell short of this number, they were all given an extra six months.

There’s really no reason this time should be different.

Foreign net buying of ISX-listed shares has been waning since the middle of last year. After rising from about IQD 900 million for all of 2010, average weekly net buying by non-Iraqis rose to over IQD 4 billion in the first half of last year but then declined to about IQD 2.8 billion in the second half. As of January 20, the year-to-date average is negative IQD 111 million.

You might think that foreigners are being scared away by the political situation. The chart tells a different story, however. The current drama in Parliament only really started in December. That was almost six months after the foreign net buying peak in early June.

The foreign pullback actually corresponds more closely to the drop in world markets occasioned by the start of the European crisis last summer. It is also noteworthy that the record IQD 17.2 billion in net foreign selling during the week of October 21 occurred just two weeks after the S&P 500 hit its low for the year.

Perhaps all that really matters for foreign inflows is the likelihood of another global financial meltdown. Too bad that scenario is still not really “off the table.”

Last month the Central Bank of Iraq co-hosted a conference with USAID’s Iraq Financial Development Project on “Integrating the Banking and Financial Services Sector in Iraq.” This event, which was held in Istanbul from November 18-19 covered two upcoming changes to the payments system that have the potential to revolutionize Iraq’s banking sector.

The first is the introduction of a “national switch” for processing credit card and ATM transactions. The switch—essentially a router and some specialized software—will connect all of Iraq’s ATM machines and credit card point-of-sale scanners to a common platform. At present, each card-issuing bank operates its own system. Because not every point of sale is connected to every system, no one card will work everywhere. Little wonder that almost everything is paid for in cash.

The second is the establishment of the Iraq Interoperable Mobile Payments System (IIMPS). This system will reach out to people who do not have a bank account by making it possible to bank by mobile phone. Users will open accounts by calling a number and speaking with a representative. They may then make cash deposits and withdrawals either at branches or at venues such as retail shops that the banks will designate as their agents. Making a payment will require nothing more than a phone call to transfer funds to the payee’s account. There will no longer be any need to pay for anything with “blocks” of hundred dollar bills.

Both systems are supposed to begin operations in 2013. Of the two, the mobile system seems particularly promising. Even with the national switch in place, merchants may be reluctant to accept credit cards because of the associated fees and the paper trail they leave for the tax authorities. The IIMPS, however, should be readily adopted by anyone with a mobile phone. That’s a lot of potential new customers for the banks. By an interesting coincidence, it turns out that mobile phone users and people without bank accounts both account for about 80% of the Iraqi population.

Annual inflation in Iraq is now 6.3%, according to government figures. It is likely this is due to rising commodity prices.

Government receipts for oil in the last quarter were up 19% to US$20bn, the highest since before the Iraq War began.

The dinar was unchanged versus the dollar during the quarter.

The International Monetary Fund congratulated Iraq for its fiscal and monetary policies.

It appears that prime minister Nouri al-Maliki is taking a hard line to cut corruption in the financial industry, in order to get lending to businesses going. Maliki sacked the chairman of a major state-owned bank, the Trade Bank of Iraq, last quarter and announced an investigation into corruption.

(Source: Government of Iraq statistics; IMF)