Banks Signal Drop in Iraqi GDP

By Mark A DeWeaver.

As of November 6, 18 of the 21 ISX listed banks have reported third quarter earnings. The numbers aren’t pretty. Rabee Securities’ latest corporate profits report shows bank-sector aggregate profits for the first nine months down 17% year-on-year. Taking out BUND, an obvious outlier with earnings growth of 115%, the decline for the remaining 17 banks was 25%.

2014 will certainly be the worst for listed bank earnings growth since the end of the sectarian civil war in 2008. This year's dismal performance compares to double digit growth for all of the last six years with the exception of 2009, which saw a 3% contraction.

M2 money supply growth is telling a similar story. (M2 includes cash in circulation and commercial bank deposits.) Unlike the earnings statistics, which cover only the listed banks, M2 also covers the state-owned lenders that account for the majority of Iraqi bank assets. As of the end of July, this aggregate was up only 4% year-on-year, down from 16% growth for year-end 2013.

These trends in M2 and bank profits are obvious warning signs for the Iraqi economy as a whole. To get some idea of what they might be telling us, I tried using them to forecast annual GDP growth. This is a somewhat suspect exercise due to the limited number of data points, but the forecasts at least fit well “in sample” (see chart).

Assuming full-year growth in M2 and bank profits of -20% and -4%, respectively, the 2014 forecast is for a GDP decline of 1.7%, not much better than the IMF’s -2.7% projection (see this article). If this is accurate, the banks are signaling the first year of negative economic growth since the US invasion in 2003.

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