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Central Bank Defends Weak Iraqi Dinar

Iraq’s Central Bank says it will not allow the Iraqi dinar to depreciate and has been selling hundreds of millions of dollars to keep the currency stable, according to a report from Azzaman.

The dinar weakened in December, prompting the bank to sell dollars in a bid to withdraw cash from Iraqi markets.

The bank did not say what caused the dinar to plummet to “lows it had not seen for years”, but officials privately say the plunge might have been due to political uncertainty in the region.

Mudher Saleh, Central Bank’s deputy governor, said there were no sound economic reasons for the currency’s weakening, but speculated that it might be the economic difficulties Iraq’s neighbours are facing, particularly Syria and Iran.

The bank coffers are said to be brimming with hard cash from oil sales.

Saleh said the bank would not let the dinar fall and in one day in December last year it sold $200 million on the open market to squeeze liquidity.

“We withdrew in one single day about one quarter of a trillion dinars, thereby brining stability to the currency,” Saleh said.

He said Iraqi traders and industrialists have turned into middlemen for these countries, which has led to a substantial growth in demand for hard currency.

(Source: Azzaman)

Posted in Banking & FinanceComments (6)

Iraqi Banking’s Great Leap Forward

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.

Posted in Investment, Mark DeWeaver on Investments and FinanceComments (7)

Iraq’s 2012 Budget Forecast Based on $80 Oil

Azzaman news agency reports that the Iraqi Central Bank’s budget forecast for 2012 is based on and oil price of $80 per barrel.

Muatasem Akram, a consultant with the bank, said the forecast was reasonable, though much below the 2012 forecasts for oil prices on international markets.

He acknowledged the bank’s budgetary estimates for oil earnings were relatively low and may lead to a revenue deficit, but said it was better to adopt predictions that were easy to achieve rather than basing the country’s budget on forecasts that may not come true.

“We expect the 2012 deficit to be met by additional exports and firmer oil prices,” he said.

More than 90% of Iraq’s hard cash earnings are generated by oil exports.

Akram said the budget was based on an average export level of 2.6 million barrels a day.

He said the Central Bank adopted what it believed to be a low export figure to ensure that the development plans in the budget were achievable.

The Central Bank, he said, was aware of assurances by the Ministry of Oil of a substantial hike in oil exports in 2012.

But he said given OPEC forecasts that world oil consumption will remain stable in 2012, the bank settled on the current oil production rates and export figures.

(Source: Azzaman)

Posted in Banking & Finance, Oil & GasComments Off

Iraq: $58bn in Currency Reserves, Should Redenominate Soon

The deputy governor of Iraq’s central bank has announced that foreign currency reserves have risen to close to $58 billion, and are expected to increase further thanks to a rise in oil revenues.

Mudher Kasim said higher global oil prices could result in a budget surplus for 2011.

Reuters quotes him as saying, “(The amount of reserves) has gradually increased since the beginning of last year, when it was $40 billion. Now it is close to $58 billion”, while AlsumariaTV puts the opening figure at $50 billion.

Last October, Kasim had put reserves at around $50 billion, with 45 percent held in dollars, 45 percent in euros and 10 percent mainly in gold and British pounds.

Iraq earned $34.1 billion in oil revenue, an increase of $8.7 billion, or 34 percent, over budgeted revenue, in the first five months of this year, Deputy Prime Minister Hussain Al-Shahristani said in June.

The deputy governor said inflation — which quickened to 7.1 percent in July from 6.4 percent in June — was under control but being monitored carefully.

Iraq, battered by years of war and economic sanctions, depends mainly on imports for most goods, including food and building materials.

“If prices continue to increase and the inflation rate approaches two digits, monetary policy tools will be strongly activated to fight inflation,” he said.

Kasim said a plan to take off three zeroes from Iraq’s currency to simplify financial transactions was awaiting parliamentary approval and said the government should approve the project sooner rather than later.

(Sources: Reuters, AlsumariaTV)

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Iraqi Inflation Up Again in May

Iraq’s core annual inflation rose to 6.3 percent in May from 6.1 percent in April, a senior official at the Central Bank of Iraq told Reuters on Sunday.

The agency reports that the figure is driven by the cost of imported goods and services, especially healthcare.

Inflation had previously risen from 5.5% in February to 5.7% in March due rising electricity prices.

(Sources: Reuters, AKnews)

Posted in Banking & FinanceComments (3)

Is the central bank serious this time?

By the end of next month, the Central Bank of Iraq (CBI) is requiring all private-sector banks to increase capital to IQD 100 bn. The banks were originally supposed to have reached this target by the end of last year but so few could have managed it that the CBI had to give them an additional six months.

With this deadline now fast approaching, 15 out of the 21 ISX-listed banks, accounting for 46% of total ISX bank-sector market cap, are still shy of the mark. (See table.) Of these, eight have announced rights/bonus issues and are already suspended from trading. Another two—BMFI and BUOI—are considering a merger. (See my last post.) The remaining five, so far as I know, have yet to announce anything.

In many of these cases, satisfying the CBI shouldn’t be too difficult. To the extent that there are retained earnings to be capitalized, capital increases don’t even require any new money. And five of these names—Economy, Mansour, Dar Es Salam, Commercial, and National—are partly owned by foreign institutions that will presumably be able to come up with the needed funds.

The interesting question, however, is what’s going to be done about banks that have insufficient retained earnings, lack deep-pocketed controlling shareholders, and have no real prospect of attracting new investors. While the CBI might like them to merge into larger entities, there does not appear to be anything in the Banking Law allowing the central bank to require this. Cancelling their licenses is an option, of course, but then does the CBI really have the administrative capacity to wind them up?

The easy way out, of course, would be to let them slide again—either by formally extending the deadline, say for another six months, or simply doing nothing once it has passed. That’s what happened last time. Will this time be different?

Posted in Construction & Engineering, Investment, Mark DeWeaver on Investments and FinanceComments Off

Mosul Bank plans merger of convenience

On April 24, the ISX website reported that Mosul Bank (BMFI) will hold a general assembly meeting on May 22 to discuss a possible merger with Union Bank (BUOI). A capital increase via a rights and bonus issue is also on the agenda.

The evident objective of such a merger would be to satisfy the central bank, which is requiring all private-sector banks to raise capital to IQD 100 bn by June. Separately, BMFI and BUOI would have to double their existing IQD 50 bn capitalizations. Together, they would immediately hit the target.

Aside from helping to satisfy the CBI’s requirement, however, it’s not clear that this deal serves any other purpose for BMFI. With only two branches—one in Baghdad and one in Erbil—BUOI just doesn’t have much of a franchise. BMFI already has branches in those two locations along with another nine in Mosul, two in Ninevah, and one each in Tikrit and Sulaymaniyah. BMFI also has over four times the deposit base of BUOI and more than twice its loan book.

Nor is BMFI actually short of capital. Like many Iraqi banks (including BUOI), its biggest single asset is cash. As of its September, 2010 balance sheet, its cash/deposits ratio came to 86%; its loan/deposit ratio was 55%.

Clearly BMFI shareholders should expect to hold more than half of the merged entity. A fair deal for them should be based on market capitalization rather than on the fact that the two banks have the same share capital.

During the past sixty trading days, BMFI’s average market cap has been 31% higher than BUOI’s. That would suggest giving each BMFI shareholder 0.57 shares in the new company for each of their existing shares, while each BUOI shareholder got 0.43 shares (57 being 31% more than 43). (Naturally this would have to be adjusted once the details of BMFI’s planned capital increase are made public.)

Such a deal would be equivalent to valuing BUOI at close to par, as its average share price over the past sixty trading days was IQD 1.01. This is not unreasonable given that its share capital is really all it would be bringing to BMFI’s merger of convenience.

Posted in Investment, Mark DeWeaver on Investments and FinanceComments (3)

Warka suitor a better bet than AsiaCell suit

A posting on the ISX website last week has revealed new details about a suit filed against Warka Bank by AsiaCell. Apparently the mobile phone operator has been unable to withdraw IQD 29.3 billion in deposits and is suing for the return of these funds under the bankruptcy provisions of the Commercial Code. (English and Arabic versions of the announcement are available at http://www.iraq-businessnews.com/2011/04/05/asiacell-to-bankrupt-warka-bank/.)

It’s not clear if Warka has any legitimate grounds for refusing AsiaCell’s withdrawal request but it’s easy to see that it might have trouble coming up with the necessary cash. The bank’s last balance sheet, for the end of 3Q 2010, showed total cash assets of only IQD 66.8 bn, down from IQD 141.1 bn at the end of 2009 and IQD 503.2 bn for 3Q 2009. And while the bank also had IQD 554.5 bn in short-term loans on its book, it’s unclear how easy these would be to liquidate.

On the other hand, however, there is no guarantee that AsiaCell’s suit will be successful. Warka has appealed the case on the grounds that failure to return deposits is not grounds for bankruptcy because they don’t count as debt for purposes of the Commercial Code. It’s hard to say what the higher court will make of this argument but it seems reasonable in principle.

In fact, it’s hard to see why the Commercial Code, rather than the Banking Law, is applicable in this case. According to Article 72 of the latter, “petitions for opening bankruptcy proceedings against a bank shall be submitted in writing to the Financial Services Tribunal.” In the event that a bank is declared bankrupt, the Tribunal is supposed to appoint a receiver to carry out a liquidation under the central bank’s supervision.

Perhaps herein lies the rub. It seems unlikely that the CBI has the administrative capacity to oversee such a process. The central bank would doubtless prefer to postpone taking action in the hopes that a foreign financial institution can be found to take up the remaining shares from Warka’s unsuccessful rights issue. This would not only provide the cash needed to pay off depositors like AsiaCell but also restore confidence in the bank, thereby reducing the demand for withdrawals.

While rumors about potential acquirers have been around for more than a year, nothing has been made public about any negotiations so far. In the absence of an effective legal remedy, however, such a takeover may be AsiaCell’s best chance of getting its money back.

Posted in Investment, Mark DeWeaver on Investments and FinanceComments (6)

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