It was less than a year ago that international investors were talking about Iraq as the next big thing. The Iraqi mobile phone company Asiacell had completed its US$1.3 billion initial public offering and daily trading on the Iraqi Stock Exchange (ISX) had risen above $10 million – from just $500,000 a few years earlier.
The ISX had its challenges – from a lack of liquidity to serious security concerns, the latter famously forcing its chief executive to carry a gun at all times – but those investment funds that had got in when times were bad were reaping the rewards, with annual returns of between six and seven per cent and a steady rise in trading volumes.
When terrorist group ISIL took Mosul in June last year, the situation was, unsurprisingly, reversed. FMG, a US investment company, had 23.95 per cent wiped off its fund in a matter of weeks. Other companies pulled out altogether. Even those that remained ended the year down 20 per cent or 30 per cent as concerns remain about Iraq’s future.
“How it pans out is really anyone’s guess,” said Sherif Salem, a portfolio manager at Invest AD, which launched an ISX-focused fund in 2010.
Average daily trading on the ISX when Invest AD launched its fund was between $1m and $2m, but over five years that increased to $15m as listings such as Asiacell – as well as general bullishness about Iraqi demographics – buoyed the banking sector, which makes up more than 50 per cent of the ISX. Now, says Mr. Salem, the ISX struggles to do more than $1m per day.
The crash in oil prices will not help. Coming alongside the war against ISIL, the halving of the price of crude on global markets has forced Iraq to increase production from 3.5 million to 4 million barrels per day and issue a more conservative budget that will still put the country at a significant deficit. As with all Middle East markets, the oil price slide cannot help but temper exuberance on Iraq’s bourse.
That said, investors feel that this year could be a good year for Iraq, both politically and economically. The international campaign against ISIL is gathering steam, and the new government, headed by Haider Al Abadi, has been well received, with the new prime minister considered a far better bet than the divisive Nouri Al Maliki. Many have been impressed with how Iraq has dealt with its dual crises so far.
“We had almost a perfect storm last year, [but] what has happened since is we have seen the threat of ISIL contained because of the global effort, a government that seems to be more inclusive than the last and a correction in the oil price,” said Shwan Taha, the chairman of the Iraqi brokerage Rabee Securities.
“All of a sudden we have reached this point where we are seeing new interest in the market. I’m not saying people are buying, but inquiries are increasing,” he added.
Geoffrey Batt, a US-based fund manager at Euphrates Advisors, which manages a US$90m Iraq-based equities fund, remains as bullish as ever on the prospects. Like Mr. Taha, he has been comforted by the way the Iraqi government has acted to combat its issues, particularly in the unified military campaign within Iraq between Shiites, Sunnis and Kurds.
“ISIL presented Iraq with an existential choice, and look how they responded – by peacefully transferring power and forming a new government. That new government immediately sprang to action … Informed opinion had no doubt Iraq was finished in June 2014, but in the short span of seven months [it] looks stronger than it did before ISIL went on its rampage,” said Mr. Batt.
Henrik Kahm, an investment analyst at FMG, has also been buoyed by the strength of the Iraqi response to ISIL, particularly after Mr. Al Maliki’s government, which was roundly criticized for abandoning many towns and cities when the militant group launched its offensive last year, ceded power. But the fight is not over yet, and investors will be watching closely this year.
“We see that ISIL will continue to lose ground on the back of continued cooperation between local and international forces, but it will likely take time to eliminate ISIL and affiliated groups as the region remains unstable because of the Syrian conflict … our outlook for the Iraqi companies obviously depend on what course the country will steer during 2015,” said Mr. Kahm.
The war against ISIL since the appointment of Mr. Al Abadi has undoubtedly boosted unity between the government in Baghdad and the Kurdish north, which had been increasingly fractious in the first half of last year. But it has also made regulators and the government increasingly receptive to reforms that would strengthen the ISX, and the decline in oil prices have been partly responsible for that, said Mr. Taha.
Rabee Securities was the sole organizer of the Asiacell 2013 listing and has been pushing for reforms to the exchange for some years, including the establishment of a custodian bank. Mr. Taha said that at last it seems that the authorities are listening.
“The government has to balance the budget, and we are seeing serious efforts towards reforming the country – in both Baghdad and Kurdistan. These reforms would never have been talked about seriously unless there had been a steep decline in the oil price. So this is a blessing in disguise,” he said.
Mr. Batt agreed, arguing that lower oil prices had forced Iraqi politicians to think seriously about increasing capital formation and stimulating economic growth.
He said that politicians are now open to discussing the privatizing of state-owned banks and utilities, providing tax incentives for private companies that list on the ISX and establishing a third-party custodian bank.
“For the first time in the eight years I’ve been investing there, Iraqi politicians are talking about the importance of capital markets, particularly the ISX,” he said.
“The ISX has the potential to attract $10bn-plus of capital into the country if it is properly utilized. At $100 oil, the government could afford to neglect the exchange’s potential. At $50 oil, they have to take it seriously.”