Tabaqchali: Iraqi Market Begins to Discount Currency Upheavals

By Ahmed Tabaqchali, Chief Strategist of AFC Iraq Fund.

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Iraq Market Report: Market Begins to Discount Currency Upheavals

The market, as measured by the Rabee Securities RSISX USD Index, was down 5.0% for January. F

or the third month in a row, the decline in the parallel market's price of the Iraqi Dinar (IQD) versus the US Dollar (USD) negatively affected the market's performance by reversing the index's 5.5% increase in IQD terms to a decline of 5.0% in USD terms.

However, unlike the prior two months, the market has started looking through and discounting the currency's volatility as seen from the market action and, in particular, those of banks and industrial stocks - two groups that stand out as net beneficiaries of the depreciation of the market price of the IQD vs the USD.

This market performance is mirrored in the index's constituents. In local currency terms, Al-Mansour Pharmaceutical Industries (IMAP) was way ahead of the rest with an increase of 41.8%, followed by the National Bank of Iraq (BNOI) up 19.1%, Kharkh Tour Amusement City (SKTA) up 8.3%, Al Mansour Bank (BMNS) up 8.1%, Iraqi for Seed Production (AISP) up 6.9%, the Bank of Baghdad (BBOB) up 5.1%, AsiaCell (TASC) up 5.0%, Commercial Bank of Iraq (BCOI) up 4.0%.

While Al-Mansour Hotels (HMAN) was flat, and Baghdad Soft Drinks (IBSD) was down 6.7%. A bout of profit-taking in the last few days of the month trimmed down most of these performances - in particular, at the peak, IMAP was up 60.1%, BNOI was up 30.9%, BMNS was up 11.3%, and BBOB was up 8.0%.

The currency's volatility means that the index is under the low end of its 33-month up-trending channel (chart below) - which still supports the market's positive technical picture as discussed here in the past few months. The macroeconomic fundamentals discussed here last year ago continue to argue that this uptrend will likely remain in force; however, its upward slope might moderate or even go sideways, as this month's action suggests.

The 2023 budget proposal, was not submitted in January as hoped for and likely will not be submitted until March, which means a delayed catalyst for the market's next move - especially as all indications suggest that it would be a much more expansionary budget that was expected here a few months ago.

RSISX USD Index versus Average Daily Turnover

(Source: Iraq Stock Exchange, Rabee Securities, AFC Research, data as of January 31st)

Continued Currency Volatility

Background: As reviewed here last month, the Central Bank of Iraq (CBI), as part of an ongoing process of encouraging the move towards the adoption of banking and away from the informality that dominates economic activity, implemented in mid-November new procedural requirements to those for its provisioning of US Dollars (USD) for importers. These procedural requirements would bring the country's cross-border fund transfers in-line with global standards which require a high level of transparency. However, they represent a seismic shift to the country's cash-dominated economy, in which large informal sectors drive the bulk of economic activity. As such, the introduction of the new regulations had an immediate detrimental effect on the volumes of the CBI's daily USD-Iraqi Dinar (IQD) transactions for cross-border fund transfers, which led to a supply-demand mismatch and consequently to a depreciation in the market price of the IQD vs the USD.

The government and the CBI subsequently introduced a sequence of measures to create demand for the IQD, and for furthering the adoption of banking - crucial measures to de-dollarize the economy, and to accelerate its evolution away from the dominance of cash. These gradually brought a measure of calm to the exchange rate; however, the raiding of two of Baghdad's largest Forex trading houses in late January brought the currency's upheavals back. Initially intended to deter currency speculators, the raid had a chilling effect on the market in that most other Forex houses in Baghdad stopped providing quotes for the purchase and sale of USD, and consequently led to a very illiquid currency market which exaggerated the currency's depreciation by about 10.0% by month end, and with it, the premium over the official price of the USD/IQD exchange rate increased to 14.8% from 2.6% in mid-November. The USD continued to shoot up into early February, but further measures announced by the CBI as well as a meeting with the CBI governor and a senior US treasury official, calmed the market somewhat and most Forex houses in Baghdad resumed the provision of quotes and rates settled around January's close.

A measure of the disruptions brought to the economy at large, given the country's dependence on exports, can be seen from the increases in the monthly average of the premium, which averaged 1.8% in January 2021-October 2022, increased to 2.6% in November, to 5.5% in December, and to 11.3% in January (green line in the chart below) - which currently are in line with prior periods of disruptions.

USD/IQD Monthly Exchange Rates

(Central Bank of Iraq (CBI), AFC Research, data as of January 31st; note data are monthly averages of the daily exchange rates, and monthly averages of the delta)

The decreased volumes of the CBI's USD-IQD transactions, versus the continued high demand for USD to satisfy the need for imports, will continue to pressure the market price of the exchange rate of the IQD versus the USD, but will likely stabilize from the very high levels seen at month end once the market attains a measure sustained calm. However, the high degrees of informality and dollarization in economic activities, and the time needed for the market to adjust to the increased levels of transparency demanded in cross-border fund transfers, means that in the medium term, the monthly average of the premium will likely settle at over 5.0%, but lower than the recent highs.

25th Arabian Gulf Cup and the end of Iraq's Isolation

Away from the currency's upheavals, the month was joyous for the country, as the city of Basra hosted the 25th edition of the bi-annual Arabian Gulf Cup football tournament, known as Khaleeji 25, for the first time since 1979; and to top it all off Iraq won the championship in a thrilling final that was full of suspense and drama to the last minute in extended time.

Crucially, the tournament marked the final stages of the reconciliation between Iraq and its once close-knit neighbours in the countries of the Gulf Corporation Council (GCC) - which was ruptured by the invasion of Kuwait in 1990. Tentative reconciliations began following the decades of conflict that Iraq went through since then but were on a small scale until the tournament in which over 50,000 GCC visitors streamed into Basra over the two weeks of the tournament. This influx was matched by that of Iraqis from across the country keen to take part in the country's first hosting of an international tournament in decades.

The atmosphere is best captured in an article in the Washington Post (*), and in particular two quotes that signify the reconciliation, from a Kuwaiti and from a Basrawi (resident of the city) - two communities that for centuries were closely knit in marriage and tribal relationships, that were severed by the invasion of Kuwait. The first "I came from Kuwait with my own car a week ago, and so far, I have not spent a single dinar" while the second "Could you have imagined that the Kuwaiti who was occupied by Iraq 30 years ago would come here to play football with us and sing about the love of Iraq?"

Basra International Stadium - Close up

(Personal photo provided by Mustafa Salim **)

While the 65,000 + capacity stadium's official name is the "Basra International Stadium", yet in Iraq, it is known as the "Palm Trunk Stadium", as its external façade was designed to mirror that of a palm tree trunk - the symbol of Basra.  

Basra International Stadium - Aerial view

(Personal photo provided by Essam Al-Sudani **)

(*) Mustafa Salim, "How a soccer tournament in Iraq became a celebration of Arab unity", The Washington Post, January 18th, 2023.

(**) Both of Mustafa Salim, and Eassam Al-Sudani were generous enough to provide these photos and to give permission to have them published.

Please click here to download Ahmed Tabaqchali's full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the Chief Strategist of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years' experience in US and MENA markets. He is a Visiting Fellow at the LSE Middle East Centre, Senior Fellow at the Institute of Regional and International Studies (IRIS), and a Senior Non-resident Fellow at the Atlantic Council. He is also a board member of Capital Investments, the investment banking arm of Capital Bank in Jordan.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.

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