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By John Lee.

Iraq's Mass Group Holding has completed its purchase of a power plant in Romania on Tuesday (27th December).

According to a statement from the administrator, Expert Insolventa SRL, the company has bought the Mintia thermal power plant (pictured) from Complexului Energetic Hunedoara SA for 91.2 million euro ($91 million) in a public auction.

Mass Global Energy Rom, a subsidiary of Mass Global Holding, was the only bidder.

Romania's Energy Ministry has stipulated that Mass Global must increase capacity by at least 1,290 MW by the end of 2026, at least 800 MW of which must be from gas and renewables. The plant currently has a capacity of 1,075 MW.

Ahmad Ismail Saleh, Chairman of Mass Holding, is quoted as saying that more than 1 billion euros will be spent on upgrading the facility.

Although an Iraqi company, Mass Group Holding has its head office in Amman, Jordan.

The full statement from the administrator can be viewed here (Romanian).

(Source: Expert Insolventa SRL)

(Picture credit: Govt of Romania)

Iraq: Staff Concluding Statement of the 2022 Article IV Consultation Mission:

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or 'mission'), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF's Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Washington, DC :

High oil prices have provided Iraq's economy with much-needed respite after a near-crisis in 2020. Nevertheless, underlying imbalances and oil dependence continued to increase. Using the opportunity provided by high oil revenues to reverse the trend of rising vulnerabilities and modernize the economy will be of paramount importance in the face of multiple looming challenges, which could severely test the limits of the current economic model. A meaningful economic transformation must start with a prudent, patient, and disciplined fiscal policy aimed at building financial buffers, reducing oil dependence, and reorienting expenditures toward priority investment and social needs. A careful calibration of the 2023 budget will be crucial to preserve gains from recent policy efforts. Alongside, decisive structural reforms will be critical to improve socio-economic conditions and promote private sector development as the key driver of growth and employment.

Economic Outlook and Risks

1. The economy is gradually recovering amid rising underlying vulnerabilities. Real GDP is projected to grow by 8 percent in 2022, driven by a 12-percent expansion in oil output. Meanwhile, real non-oil GDP is expected to expand at a more moderate pace of 3 percent after rebounding by 21 percent in 2021. Inflation has been relatively contained, averaging 5 percent during the first 10 months of 2022, as the pass-through from high global commodity prices has been muted by food and fuel subsidies. Helped by high oil prices, this year's fiscal and external current account balances are expected to reach surpluses of 6 and 11 percent of GDP, respectively, while foreign exchange reserves of the central bank could exceed $90 billion by end-year. At the same time, these surpluses veil widening of the non-oil fiscal balance, and Iraq's dependence on oil continued to increase with the oil price needed to balance the government budget ("budget breakeven oil price") reaching US$66 per barrel in 2022, up from US$52 per barrel in 2019.

2. Near-term outlook is positive, but vulnerabilities could manifest themselves in the medium term. Oil output is projected to gradually rise from 4.4 to 5 million barrels per day by 2027. Non-oil real GDP growth is expected to accelerate to 4 percent in 2023-helped by the stimulus from the Emergency Law for Food Security and Development-before moderating to 3.5 percent in the medium term. Under the baseline projection of declining global oil prices and continued expansionary fiscal stance, both fiscal and external balances are projected to decline and turn into deficits by 2025. Alongside, foreign exchange reserves could peak at around US$100 billion in 2024 and rapidly decline over the medium term.

3. This outlook is subject to significant downside risks, amid multiple looming challenges. A faster decline in global oil prices could reignite financing pressures sooner. Government finances are particularly vulnerable to faster accumulation of losses in the electricity sector and the depletion of the State Pension Fund, as well as the rising costs of climate change.

Policy Priorities

4. A sound fiscal framework will be critical to tackle Iraq's economic challenges. Policymakers need to carefully balance the goals of saving the oil windfall to strengthen resilience to future oil price volatility, and increasing critical social spending and public investments, while gradually reducing dependence on oil. IMF staff recommends a commitment to a fiscal rule targeting a gradual reduction of the non-oil primary fiscal deficit to build a fiscal stabilization buffer which would improve the government's ability to smooth expenditures in response to future oil price declines. At the same time, the fiscal strategy should seek to allocate sufficient resources for public investments and the social safety net to support Iraq's critical development needs and the vulnerable population.

5. Careful calibration of the 2023 budget parameters will be pivotal. It would be important to provide adequate indexation of targeted cash transfers and low-income pensions to protect the most vulnerable from the rising cost of living. At the same time, a large procyclical boost to expenditures is not advisable as it could fuel inflation pressures, further increase the government budget's dependence on oil revenues and create conditions for a costly boom-bust cycle. IMF staff recommends saving a significant portion of the oil windfall by targeting a non-oil primary fiscal deficit of ID 114 trillion (58 percent of non-oil GDP) in 2023, most importantly by containing growth of the government payroll and mobilizing non-oil revenues.

6. Elevated inflation risks warrant vigilance on the part of monetary policy. Although inflation has remained stable in recent months, there are significant risks of its acceleration in the near term with a looser fiscal stance and second-round effects of high global commodity prices. Should these risks begin to materialize, it would be important for the central bank to be prepared to tighten domestic financial conditions as needed to avoid fueling domestic drivers of inflation.

7. Implementation of the proposed fiscal framework needs to be accompanied by sustained policy efforts in several key areas:

• Upgrading public financial management notably by urgently establishing a Treasury Single Account and implementing an Integrated Financial Information Management System (IFMIS), in addition to strengthening control over commitments and contingent liabilities.
• Diversifying government revenues , including by making payroll taxes more progressive, eliminating regressive exemptions, strengthening tax and customs administration, and introducing taxes on the sales of selected non-essential goods and services.
• Reducing the government wage bill , which consumes around 40 percent of the annual budget, crowding out other priorities, and cannot be sustained in the long run, which puts a premium on promoting private sector job creation. A multi-pronged approach should focus on strengthening control over payroll; an attrition-based employment reduction strategy; and close alignment of government pay and allowances with the private sector. In parallel, IMF staff encourages developing a civil service reform and a national employment strategy to improve labor force participation, remove obstacles for private employment, and reduce informality.
• Enhancing the social safety net. Limiting eligibility for the untargeted food ration card program would allow to significantly augment the budget for targeted cash transfers. Automatic inflation indexation of cash transfers would ensure adequate protection. Furthermore, a pension reform is increasingly urgent, most importantly to restore the financial sustainability of the State Pension Fund. Going forward, close alignment or integration of pension systems for private and public sector workers is needed to facilitate labor mobility and strengthen incentives for private sector employment.
• Fixing the electricity sector , which incurs an annual loss in excess of 3 percent of GDP while being unable to meet domestic demand. A comprehensive reform strategy should focus on enhanced monitoring and transparency of the sector's costs, a review of the tariff structure, investments in gas capture and renewable energy sources, and sustained efforts to improve collection and reduce technical losses.
• Strengthening Financial Stability. Accelerating implementation of core banking systems and initiating the restructuring of large state-owned banks remains a critical priority. The IMF team welcomes the completion of Iraq's first AML/CFT national risk assessment and agrees with the authorities' plans to swiftly proceed with implementing its key recommendations. IMF staff also supports the central bank's efforts to strengthen monitoring of transactions through the foreign exchange auction and its plans to explore alternative trade finance mechanisms to facilitate trade. In parallel, the mission recommends developing liquidity management tools to better support exchange rate stability.
• Improving Governance. IMF staff welcomes the authorities' efforts to implement the 2021-24 National Integrity and Anti-Corruption strategy and emphasized the importance of continuing to strengthen governance, including through timely completion and publication of the audit reports of government accounts, improving the legal framework and streamlining the institutional structure for combatting corruption, and advancing digitalization of government institutions.

(Source: IMF)

By John Lee.

Iraq's Mass Group Holding has bought a power plant in Romania.

According to a statement from the administrator, Expert Insolventa SRL, the company has bought the Mintia thermal power plant (pictured) from Complexului Energetic Hunedoara SA for 91.2 million euro ($91 million) in a public auction.

Mass Global Energy Rom, a subsidiary of Mass Global Holding, was the only bidder.

Romania's Energy Ministry has stipulated that Mass Global must increase capacity by at least 1,290 MW by the end of 2026, at least 800 MW of which must be from gas and renewables. The plant currently has a capacity of 1,075 MW.

Ahmad Ismail Saleh, Chairman of Mass Holding, is quoted as saying that more than 1 billion euros will be spent on upgrading the facility.

Although an Iraqi company, Mass Group Holding has its head office in Amman, Jordan.

The full statement from the administrator can be viewed here (Romanian).

(Source: Expert Insolventa SRL)

(Picture credit: Govt of Romania)

U.S. Embassy Baghdad announces an online auction from June 26 to July 03, 2022.

This is a routine auction to dispose of excess used property; U.S. Embassies all around the world routinely hold these types of auctions to dispose property that is no longer needed by the U.S. Government.  The auction will be open to U.S. Embassy personnel and the public.

The online auction includes ten (10) container lots of excess property furniture and can be viewed on Baghdad Online Auction (state.gov).  Each lot is a 20-ft. or 40-ft. container that has an assigned lot number, detailed description, and current condition of the items along with photos.

The lots consist of a variety of household furniture, including but not limited to sofas, loveseats, dining chairs and tables, wooden furniture.

Interested bidders will bid on the entire container and its contents, which will be sold in U.S. dollars on an "as is /where is" basis.  All sales are final and purchased items cannot be returned or refunded.  This auction will be conducted exclusively online; site visits are not allowed before the auction.

All interested bidders must complete the following registration steps:

1. Register at https://online-auction.state.gov/en-US/Account/Register.
2. Fill out this form: https://forms.gle/baiHQAqdaVFu1nyZA.
3. Pay a $50 USD refundable registration fee.

Bidding will open Sunday, June 26, 2022, 0800 AST, and will close on Sunday, July 03, 2022, 1700 AST.  Please read the "How It Works" and "User Agreement and Privacy Notice" before participating in the online auction.  Winning bidders will be notified via email and will have until Sunday, July 10, 2022, to pay.  Details on payment instructions will be provided via email and listed in the "How to Pay" section on the online auction platform.

Upon confirmed receipt of payment, the embassy will provide further guidance on the date and time for pick-up.  The container(s) will be retrieved from the Baghdad Diplomatic Support Center (BDSC). In coordination with the embassy, winning bidders will need to provide additional information for PMNOC approvals to retrieve the containers from BDSC to their intended destination.  Winning bidders are responsible for preparing all necessary documentation for security checkpoints and for providing the transportation to pick up the entire lot container(s) and its contents.  Successful bidders will not be allowed to empty the container contents; they will need to pick-up the entire 20-ft. or 40-ft. container(s).  Any paid items that are not picked up during the scheduled time frame will be disposed of, and there will be no refund or possibility for their retrieval.  All local customs duties and taxes are the responsibility of the buyer and may be assessed by the Government of Iraq.

For more information, please contact [email protected]

(Source: U.S. Embassy Baghdad)

By John Lee.

An Iraqi 100-dinar note has reportedly sold at auction in London for £29,760 ($39,161).

The rare 1942 note features a portrait of King Faisal II as a child, and beat the estimate of £10,000 to £15,000.

According to Coinworld, it was bought by "an advanced collector of Iraqi paper money and coins."

(Source: Coinworld)

By John Lee.

The Iraqi Cabinet held its weekly meeting on Tuesday under the chairmanship of Prime Minister Mustafa Al-Kadhimi.

Addressing the meeting, the Prime Minister said the reserves of the Central Bank of Iraq (CBI) have increased by $4 billion, adding that the government has been able to tackle what it describes as "the corruption at the notorious foreign currency auction".

The Prime Minister directed all ministers not to repeat the mistakes of previous governments, and not to let bureaucratic practices impede the implementation of strategic decisions.

(Source: Govt of Iraq)

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

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

Market Review: "Still the Dog Days of Summer"

The unusually, more subdued than normal "dog days of summer" witnessed in August were extended into September as economic activity slowed further, especially as the 40-day Arbaeen pilgrimage approached its climax in early October - as can be seen from the Google mobility data in the chart below.

(Baseline is the median, for the corresponding day of the week, during January 3^rd - February 6^th,

Source: Google, data as of October 4^th.)

The Arbaeen similarly affected the USD-Iraqi Dinar (IQD) transaction volumes conducted by the Central Bank of Iraq (CBI), which administers five daily USD auctions every week to facilitate foreign trade transactions (transfers, indicated as green bars in the below chart) and to satisfy the need for physical USD for Iraqis travelling abroad (cash, indicated as red bars in the below chart). Demand for USD in CBI's auctions is a reasonable proxy for consumer demand, given the country's high dependence on imports to satisfy domestic consumption of goods and services, and thus this decline confirms the slowdown implied by the mobility data.

(Source: Central Bank of Iraq (CBI), Asia Frontier Capital, data as of October6^th.)

While the Arbaeen had similar effects on economic activity every year, the slowdown this year comes from a lower base than in other years. And so, the moderation of activities might be a reflection of a wider economic slowdown given the fading effects of the rebound from the lockdown-induced plunge. The economy, like other economies worldwide, is probably adjusting to a "new normal" post-COVID - that is at risk of being in a prolonged sub-par state as a second wave of the pandemic emerges worldwide, bringing with it partial lockdowns.

Nevertheless, the slowdown of economic activity in the two weeks leading up to the Arbaeen is at odds with the increase, in the same two weeks, from 2.9% to 4.1% in the premium of the market rate over the official exchange rate of the Iraqi Dinar (IQD) versus the USD (chart below).

(Source: Central Bank of Iraq, Iraqi Foreign Exchange Houses, Asia Frontier Capital, data as of October 6^th.)

The contradiction of an increasing USD rate, while USD sales volumes are decreasing, might be explained by jitters as rumours circulate of an imminent IQD devaluation as a solution to the government's struggle to meet its most pressing expenditures that are much higher than its current oil revenues. Such rumours are routine in a country in which the dissemination of economic updates is poor, and trust in the government is very low, driving perceptions and subsequently fears. These fears notwithstanding, the 4.1% premium, while high compared to the lows that prevailed for most of 2018-2019, is lower than levels reached during the height of the lockdown when similar fears were making the rounds. More importantly, the current premium levels are substantially lower than the levels reached at the worst of the last economic crisis in late 2016 as can be seen above.

The rumours of an IQD devaluation are fuelled by the ruling political class' pursuit of a "silver bullet" solution to the country's fiscal crisis. A pursuit that is resurrected whenever oil revenues decline substantially below expenditures, such as during the current period and in 2014-2016. The appeal of the devaluation silver bullet is that a weaker exchange rate of the IQD versus the USD would enable the state to meet its IQD expenditures from its USD based oil revenues, resolving the state's fiscal crisis. However, such a respite is fleeting as prices would soon rise in lockstep with the devaluation, given the country's high dependence on imports to satisfy local consumption, and the inability of local industry to meet this demand. This in turn would raise the cost of living and lower the living standards of a large segment of the population, leading to the very social discontent that the political class is seeking to avoid.

However, a gradual depreciation of the IQD versus the USD is likely as lower future oil revenues weaken the forces supporting the current exchange rate, and the new government's reform programme gradually unfolds. It was argued in "Revisiting the Iraq Thesis, Five Years Later" that:

"The dilemma for the government is that on the one hand, the basic governing equations of Iraq's political system - which largely allowed the political elite to maintain their oversized influence on economic policies - are still in force, and as such the elite will likely derail real reforms that threaten their interests; while on the other hand the rolling economic crisis means that alternative proposed stop-gap measures will not work for long and so reforms are unavoidable in the end.

A way out is in pursuing reforms that will yield real economic dividends, yet at the same will not threaten the elite's interests. The first of these are the low hanging fruit, ignored during the years of oil aplenty, of measures that will allow the private sector to grow, supported by an unconstrained commercial banking sector and unhindered by government bureaucracy"

The private sector's growth, supported by the reform programme, will take time, measured in years not months, to grow sufficiently enough to satisfy local demand for goods and services. A more competitive exchange rate, in particular versus the country's largest trading partners, would support and accelerate this development.

The equity market, as measured by the Rabee Securities RSISX USD Index, meanwhile rose 2.9% in September, its rise was strongly influenced by the stellar performance of its largest index component, Baghdad Soft Drinks (IBSD), with an index weight of 33.5% and which was up 14.9% for the month, benefitting from the re-investment of its dividends. On the other hand, the two leading banks that drove the market higher until September corrected, with the Bank of Baghdad (BBOB) down 17.8%, and the National Bank of Iraq (BNOI) down 2.9%. Other market leaders were either flat or corrected by a few percentage points.

In spite of the market's lopsided rise for the month, this performance builds on the four-month recovery following the multi-year lows reached in April, for a total increase of 34.3% since then. However, notwithstanding this strong performance, the market is almost back to where it started the year - at the tail end of a brutal five-year bear market. The Rabee Securities RSISX USD Index (RSISUSD) is still down about 66% from the 2014 hights, which from a risk-reward perspective is attractive unlike other markets worldwide, most of which have had multi-year bull markets and would need to discount vastly different economic assumptions than those that led to their multi-year rises.

Normalized returns for the RSISUSD Index vs MSCI World Index, MSCI Emerging Markets Index and MSCI Frontier Markets Index

(Source: Bloomberg, data as of October 8^th.)

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

Mr Tabaqchali (@AMTabaqchali) is the CIO 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 non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He is a board member of the Credit Bank of Iraq.

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.

By John Lee.

Iraq's Ministry of Agriculture has reportedly announced that it will export barley for the first time.

A ministry spokesman told Shafaaq News Agency that 700,000 tons of barley will be auctioned next week, with ten countries expressing an interest in bidding.

(Source: Shafaaq)

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

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

Market Review: "Lockdown Iraq & the month of Sundays"

Iraq, like other countries, went into full lockdown on March 16^th that was only partially lifted just before the fasting month of Ramadan - in which activity is normally subdued. Unlike many countries, Iraq went a step further in that its lockdown included its whole financial sector.

In particular, the Central Bank of Iraq (CBI) and the banks that it regulates suspended most activities during the lockdown. In turn, this negatively affected the availability and circulation of the USD in the country's cash dominated economy - where about 85% of the currency in circulation is outside the banking system.

The CBI conducts five daily USD auctions every week to facilitate foreign trade transactions (transfers or green bars in the chart below) and to satisfy the need for physical USD for Iraqis travelling abroad (cash or red bars in the chart below). The closure of this facility over the lockdown period, and its much-reduced frequency following that, have naturally resulted in an unmet need for USD and hence a rise in its price in the market versus its official price.

Typically, the market price of the USD is at a premium to official prices, but spikes higher during periods of uncertainty or crises - the last of which were the momentous events at the start of the year that raised the feared spectre of a US-Iran proxy war fought in the country. This premium began to spike, and stayed at elevated levels, as the lockdown came into full effect as can be seen from the chart below.

(Source: Central Bank of Iraq (CBI), Asia Frontier Capital. The CBI did not provide market prices on March 16^th-April 21^st, so the chart assumes gradual increases in prices in this period)

Consequently, this affected the market price of the physical USD which normally trades at a further premium of 2-4% over the premium discussed above (i.e. the gold/brown line in the above chart). This extra premium widened, as it does during spikes, and is now about 8-10% and remained at these elevated levels by the CBI's ceasing of its offering of physical USD in its currency auctions from mid-March (above chart). In a country in which the dissemination of economic updates is poor and trust in the government is very low, rumours come to the fore and drive perceptions and subsequently fears.

One such rumour that dominated perceptions was that sharply falling oil prices were resulting in major USD shortages at the government level and it was thus conserving its reserves by stopping the flow of physical USD. This line of thinking has some merit as it takes its cue from a similar pattern during 2014-2017's twin crises of the ISIS conflict and the collapse in oil prices. However, then the CBI restricted the supply of the USD during its auctions but didn't stop either transfers or cash offerings. As it turned out, the physical USD offerings were halted as no foreign travel was taking place, given that they are meant to satisfy the needs of individuals' foreign travels.

Rumours of a USD shortage aside, the weakening of demand in the economy is evident as seen from the smaller volumes of transfers in the currency auctions during late April, and from the "Community Mobility Reports" provided by Google. These are based on data from mobile phone users who have opted-in for "Location History" on their Google accounts. These users provide a reasonable population sample given the high levels of mobile penetration in Iraq (chart below) - more so given the high combined Samsung/Huawei market share, a proxy for Google's Android system, which is about 75% in mobiles - and thus should provide a reasonable picture of economic activity during the lockdown.

(Source: Statista)

While every sector of the economy has felt the effects of the lockdown, the informal sector - dominated by retail trade, transport and hospitality, and which accounts for the bulk of private-sector economic activity in Iraq - has been particularly hard hit as can be seen from the chart below, which shows changes in activities compared to the baseline January 3^rd-February 6^th.

(Baseline is the median, for the corresponding day of the week, on January 3^rd-February 6^th,

Source: Google, data as of April 30^th)

However, the decline in activities are likely to have been more precipitous than shown in the above chart as activities in the retail, transport and hospitality sectors were subdued during the baseline period given the chilling effects of the dramatic events at beginning of the year. More so, these events came on the back of a slowdown induced by the continued countrywide demonstrations from October 2019.

The Iraq Stock Exchange (ISX) resumed trading on April 26^th, after closing on March 16^th, and in-line with government guidance of reduced commercial activity, it reduced trading days to three days per week from five. However, the board of governors of the ISX, in a misguided attempt to calm market fears, lowered the daily stock price limit downs to 5% from 10%, but kept the upside limit at 10%. Inevitably it did the exact opposite of its intended purpose, as the same low trust in authorities fuelled rumours that the market authorities were hiding some major negative news. The new limit-down limits served as magnets for sellers during the remaining three trading days of the month with prices obligingly closing down 5% on each of these days. As often happens in frontier markets, buyers disappear for several days as sellers chase down small bids and drive prices to very attractive levels. While prices tend to recover as buyers return to pick up bargains, which seems to be taking place in early May.

For the three days that made the trading month of April, the Rabee Securities RSISX USD Index (RSISUSD) was down 12.7%. The argument made here last month that " Iraq's equity market was discounting neither an economic nor a corporate earnings recovery, it's difficult to see why it should decline as other markets have elsewhere", is stronger now, especially given that the market by end of April is now down 75% from the 2014 peak.

The closing argument of the Asia Frontier Capital team in the March newsletter, is an appropriate end here.

"The recent stock market correction, though painful, is now providing an excellent entry point to investors as valuations across our universe are at 10-year lows - stock picking has never been easier. Though we believe global markets could remain volatile in the near term as the number of infections rise and poor economic numbers come through, a sustained rally could be seen once there is an indication of infections peaking especially in Europe and the U.S.

"Asian frontier markets have bounced back very strongly after previous episodes of market dislocation such as in 2008-09 with markets like Pakistan and Vietnam generating much higher returns than major indices. Though it is very easy to get distracted with the negative consequences of the pandemic, Asian frontier markets are at present and will over the next few months provide an opportunity to invest in these markets last seen a decade ago."

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

Mr Tabaqchali (@AMTabaqchali) is the CIO 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 non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He is a board member of the Credit Bank of Iraq.

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.

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

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

By February's end the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), was down -3.7%.  The month saw a continuation of the heavy foreign selling in January and mostly in the same foreign favoured stocks, i.e. Baghdad Soft Drinks (IBSD), Asiacell (TASC), and Mansour Bank (BMNS). However, not only was this foreign selling comfortably absorbed by local buying, but its effect on the market was much smaller than previous instances of foreign selling as can be seen from the chart below:

(Source: Iraq Stock Exchange, Rabee Securities, Asia Frontier Capital, daily data)

The most recent instance of such concentrated foreign selling was in January-February 2019, which although much smaller in absolute amounts, led to declines across the board that took the market to multi-year lows. It should be noted that foreigners were buyers too in instances of concentrated foreign selling, but that the selling then soured local sentiment and so was the main driving force behind the weakening prices which lasted even when the selling subsided.

The most promising aspect of the current market's action is that while overall market turnover expanded meaningfully in both of January 2020 and February 2020 versus the turnover of the last 12 months, it was concentrated in the stocks mentioned earlier. Ordinarily it would have been next to impossible for the usual liquidity in each of these stocks to deal with this volume of selling without significant price declines, however local demand absorbed them relatively comfortably. For January and February: TASC was -6.7% and -12.3%, IBSD was -10.3% and -11.9%, and BMNS was -3.0% and 0.0% respectively. Bank of Baghdad (BBOB), another foreign favoured stock, on the other hand was up +7.1% in February, reflecting foreign buying after experiencing heavy foreign selling in January that saw it down -6.7% then.

(Source: Iraq Stock Exchange, Asia Frontier Capital, monthly data)

The market's action indicates that it is bottoming and that stock prices have discounted enough negatives that would comfortably include all of the current concerns - especially considering that the action in January and February comes at the end of a brutal multi-year bear market with back to back declines of -1.3% in 2019, of -15.0% in 2018, -11.8% in 2017, -17.3% in 2016, -22.7% in 2015, and -25.4% in 2014.

Foreign sellers would have had a smorgasbord of concerns to choose from: Some could be expectations of instability arising from the current political chaos in Iraq, ramifications of the US-Iran tensions, and the spill over effects of these on the Iraqi economy. Or the speed and extent of the advance of the coronavirus raising fears of a worldwide pandemic, the effects of this spread on the world economy, and the subsequent consequences for oil prices - the major source of Iraq's earnings.

However, as serious as these concerns are, the latest macro figures show that they had a short-term effect on the Iraqi economy that has subsided - at least this is the message as of end of February. The first of these macro figures is the market price of the exchange rate of the Iraqi Dinar (IQD) versus the USD, which continues to decline and converge to the official price by end of February, after recovering from mid-January onwards as reported here last month. It is now at the lower end of levels that prevailed over the last 20 months since it began diverging in October following the countrywide demonstrations, and spiking following the events at the start of the year as can be seen below:

(Source: Central Bank of Iraq, Iraqi Foreign Exchange Houses, Asia Frontier Capital)

More importantly the premium of the IQD-USD exchange rate for physical USD notes has returned to the lower end of its normal range of 2-4% over the market price of the USD (red line in chart above). This premium widened significantly during the spikes in the market rate for USD earlier in the year but settled down to about an 8% premium by the end of January, and then to under the 2-4% range by the end of February. All of this argues that the FX market is indicating that the disruptions to economic activity over the last few months have subsided considerably. Although the counter argument would be that the decline in the premium is a function of weakening demand in the cash dominated local retail and trade markets. But then the volumes in the Central Bank of Iraq (CBI)'s daily currency auctions, which are a function of bids or orders for USD, have been mostly at the same levels that prevailed over the last 20 months or so and thus it's difficult to argue that end demand has weakened, but this counter argument cannot be dismissed yet.

The uncertainties, and differing interpretations of the health of the economy, will continue to persist until other macro data for January, February and beyond are released by the CBI over the next few weeks. Whichever interpretation prevails, preliminary data on the deposit component of the monetary base M0 (i.e. commercial bank's reserve deposits with the CBI) show a meaningful drop in January from the levels of the last few months as can be seen below. A decline in banking reserves held with the CBI would be due to drops in customer (consumer, business and government) deposits held with these banks.

(Source: Central Bank of Iraq, Asia Frontier Capital, data as of end of January 2020)

This drop argues that the significant geopolitical events early in the year had a meaningful negative impact on the economy in January. Although the deposit component of the monetary base M0 by end of January recovered from the larger drop seen in the middle of the month, the preliminary nature of this data precludes any definite answer. Moreover, updated CBI figures would be overall figures which would not broken down into consumers, businesses or government deposits. Moreover, it's equally difficult to see if this was a phenomenon for January and that February would begin to witness a recovery or if it would be an extension of January.

Until newer data suggests otherwise, the most likely explanation is that the disruptions to economic activity, and in particular to the cash-dominated retail and trade markets, led to a decline in deposit formation as cash was used by companies/corporates to fund operations in an environment of declining sales. Partially supporting this argument, are CBI data as end of November 2019 for private sector deposits and loans, which shows continued growth in deposits and loans, with deposits ahead, as can be seen from the chart below.

(Source: Central Bank of Iraq, Asia Frontier Capital, data as of end of November 2019)

Earnings data from two of the leading banks, National Bank of Iraq (BNOI) and the Commercial Bank of Iraq (BCOI) support the continuation of these trends into end of 2019. BCOI reported a drop of -4% in loans in 2019 over 2018, but deposits increased by +9% in the same period. While, BNOI reported a +120% increase in loans in 2029 over 2018, and deposits increased by 32% in the same period. The difference in performance reflects the different positions of each bank and its growth strategy - which would be seen as other leading banks report over the next few weeks.

Quarterly earnings data, especially for BNOI which has been leading the banking sector in 2019, lend credence to linking the divergence between the market price of the USD from the official price, that began in October of 2019, to the disruptions to economic activity from the start of countrywide demonstrations then. These quarterly data show a sequential slow-down or decline in these metrics by the fourth quarter (Q4). Loans increased by +2% in Q4 over Q3, +22% in Q3 over Q2, and +39% in Q2 over Q1. Deposits on the other hand declined -14% in Q4 over Q3, increased +20% in Q3 over Q2, and +22% in Q2 over Q1 - while Q4 numbers would be affected by year-end requirements for closing the books, which in Iraq are both cumbersome and time consuming. Nevertheless, the decline in deposits in Q4 would argue that the use of cash, through deposit withdrawals, by companies/corporates to fund operations might have started earlier than January as argued in an earlier paragraph.

Overshadowing the economic data is the continued political paralysis and the inability of the political class to deal with the demands of the five-month long youth-led protest movement. In the last few weeks an unsustainable holding pattern has developed in which the nationwide demonstrations persist, in passion if not in the same intensity of earlier months, while the repression apparatus of the state and the sub-actors continues to take its toll in casualties- both in death and injuries. For now, the political class's existential fear from the demonstrations has subsided enough for it to return to the old political squabbles as can be seen from the difficulties that the prime minister-designate faced in forming a government. These proved too difficult to surmount which eventually forced him to withdraw his nomination. This means a new search began for the illusive candidate that would square the circle- i.e. satisfy the protest movement's demands for change, while preserving the status quo for the political elite.

The political class's existential fear from the demonstrations will continue to ebb and flow, and thus these political uncertainties are likely to continue. However, the economic consequences would be the same whether a new government forms under another prime minister-designate, or if the current caretaker government continues to limp on. These consequences would be that no new budget will be passed and thus the government continues to implement the current spending parts of 2019's expansionary budget. While it is difficult to estimate the medium-term effects of the disruption to the world economy from the coronavirus and thus on oil prices, yet the government has enough fire power to continue this expansionary budget at least for 2020. This firepower is in the form of a likely year 2019 surplus of USD 2-4 bln for a total of a three-year surplus of USD 25-27 bln - more than enough to compensate for any shortfall in oil revenues during 2020.

Drops in oil revenues in 2020 are likely to happen given the severe drop in global oil prices over the last few weeks as seen in February's export data. Oil exports in February were about USD 5.1 bln down from USD 6.2 bln in January, reflecting a drop in Iraqi oil price from USD 60.14 per barrel in USD 51.37. However, exports increased to 3.887 mln barrels per day (bpd) in February, up from 3.694 mln bpd in January and therefore revenues from oil exports would be about USD 5.5 bln, and not USD 5.1 bln, if February had 31 days and not 29 days making for better month-on-month comparisons.

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Mr Tabaqchali (@AMTabaqchali) is the CIO 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 non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He is a board member of the Credit Bank of Iraq.

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.