Investing in Iraq

Investing in Iraq

Iraq Gearing up for Major Investment Opportunities

7.19.13

Iraq is seeing a surge in investment activity, and it’s a good time for you to get in on the action. Let’s take a close look at what’s going on.

Bloomberg notes that major banking companies—we’re talking about JP Morgan Chase & Co. (NYSE: JPM), Citigroup Inc. (NYSE: C), and Standard Chartered—set up shop over in Iraq, as the nation begins to rebuild its domestic infrastructure and boost crude oil production. Remember, Iraq happens to be OPEC’s second-largest producer, which is going to be a powerful draw for international investments.

Recently, JPMorgan finalized a one-year agreement with the Trade Bank of Iraq to help fund imports of various goods and services. And Iraq is worth doing business with, after a long period of warfare and strife. Back in June, the nation churned out 3.2 million barrels a day of crude.

By the end of 2013, Iraq should see 3.5 million barrels of crude per day. Over this year, Iraq’s government is set to increase spending by 18 percent, reaching $118 billion. And the IMF has already projected that Iraq should see a yearly economic growth rate of around 9 percent. That’ll put Iraq’s growth rate at the fastest pace, coming just after Libya, out of 18 neighboring countries. And that’s also the kind of growth that India and China were displaying just a few years back when everyone was awestruck at the massive growth being showcased out in Asia.

Banking in Iraq has come a long way, too. After the U.S.-led invasion to oust Saddam Hussein, foreign banks were not allowed to operate within Iraq. Now there are 15 international banks with presence in Iraq, as well as seven state banks, 23 private lenders, and 9 other banks that operate under Islamic law.

Amidst all this, Bloomberg points out that Citi aims to set up shop in Baghdad, Basra, and Erbil to cash in on some of the estimated $1 trillion in infrastructure investment that’s projected to happen. Indeed, Citi hopes to be part of an international group of banks involved in financing a major pipeline that will push Iraq’s oil and natural gas all the way through Jordan. Likewise, Standard Chartered intends to open up operations in Baghdad and Erbil this year, and (in 2014) another one in Basra.

Encouraging signs

From 17 percent in 2008, Iraq’s prime lending rate is now down to just 6 percent, even as domestic crude production continues to rise rapidly. Overall, Iraq’s five biggest banks saw their combined net income increase 207 percent between 2010 and 2012, and their earnings per share have more than doubled.

These are impressive numbers indeed. However, there are certain pitfalls awaiting such sustained international investment. Spates of violence and an endemic culture of corruption are likely to cause some problems along the way, notes Fox Business. But, when you consider that the IMF believes Iraq’s $150 billion economy is going to increase by 9 percent over 2013 after posting growth of 8.4 percent in 2012, that’s hard to ignore.

And Iraq’s oil is even more attractive. The International Energy Agency believes that Iraq will contribute as much as 45 percent of the entire world’s incremental oil supply by the end of this decade. In fact, the IEA believes Iraq will become the world’s second-largest exporter by sometime in the 2030s. That’s pretty heady stuff, and it’s little wonder that major companies are lusting after Iraq.

Another very encouraging point is that Iraq’s domestic credit is about 9 percent of its GDP (compare that to most of the Middle East/North Africa region, where domestic credit tends to be as much as 55 percent of GDP). Also, the nation’s outstanding credit is $10 billion. That’s a pretty attractive national credit profile, and it’s just one more reason why companies are so interested in Iraq. Basic banking infrastructure—ATMs, bank branches—are lacking across the nation. It’s just ripe for development and serious infrastructure-building. Fox Business quotes:

“Iraq is an important market, with an economy that has substantial potential over time. Having a presence in Iraq will position us to better attune our services to the banking needs of our clients as they grow and develop their businesses in the country,” James Cowles, CEO of Citi’s Europe, Middle East and Africa division, said in a statement last week.

We should expect the Iraqi dinar to experience a major improvement in terms of value, but we should also expect that it will take a while. There won’t be any rapid miracles here.

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