The Biggest Opportunity Since WWII

You might think that sitting atop the world’s fifth largest oil reserves would have established Iraq as one of the wealthiest nations on Earth by now. After all, it has been almost 11 years since the country was liberated from dictator Saddam Hussein’s oppressive rule and mismanagement of the nation’s resources.

But turning Iraq around after decades of mismanagement is no easy task. The CIA World Factbook outlines just how complex Iraq’s recovery is:

• “Iraq will need to make significant upgrades to its oil processing, pipeline, and export infrastructure to enable [its oil export] deals to reach their economic potential.”

• “Iraq is making slow progress enacting laws and developing the institutions needed to implement economic policy, and political reforms are still needed to assuage investors’ concerns regarding the uncertain business climate.”

• “Rampant corruption, outdated infrastructure, insufficient essential services, skilled labor shortages, and antiquated commercial laws stifle investment and continue to constrain growth of private, nonoil sectors.”

• “Unemployment remains a problem… Encouraging private enterprise through deregulation would make it easier for Iraqi citizens and foreign investors to start new businesses… Restructuring banks and developing the private sector would be important steps in this direction.”

We can boil all of Iraq’s problems down to two things:

1) Even though money is coming in through oil exports, revenues are nowhere near their optimum potential due to poor infrastructure.

2) Money does not stay in the country to build the domestic economy, but is migrating out due to a lack of adequate banking and deregulation to foster business development in the private sector.

Thankfully for the Iraqi nation, its government is finally taking a serious step toward addressing these problems through one easy solution, the creation of a national investment bank – The Investment and Development Bank of Iraq.

Why it is Needed

Now it’s not as if Iraq doesn’t have enough banks to take care of business. There are already some 23 private banks, 9 private Islamic banks, 7 state banks, and 16 foreign banks operating in the country. That’s 55 banking institutions with thousands of locations throughout the land!

The problem, however, is that Iraq’s fragmented banking system and non business-friendly government policies make moving investments about inefficient, costly and time consuming.

Corruption, inadequate banking services, difficulty transferring funds, and complicated bureaucratic red tape have made it difficult and unprofitable to do business in Iraq.

As a result, businesspeople, companies and skilled workers are choosing to invest and work in neighboring countries, such as ex-Soviet state Georgia, which offer such incentives as tax-free investments, expedited banking services, and easily obtained one-year working visas.

Meanwhile, back in Iraq, when businesses move out, so do jobs and investment opportunities. Iraqi citizens not only have nowhere to work, but nowhere to invest their money – which ends up leaving the country as well.
In a telephone conversation with Middle East newspaper Al-Monitor, Abdul Hussein al-Anbaki, adviser to the prime minister for economic affairs, explained, “The migration of Iraqi capital did not start after US troops entered the country in 2003. Rather, it began in the 1980s, when the former regime split profits with the private sector.”
The government had its hand a little too deep inside its citizens’ pockets, and de-incentivized entrepreneurialism, triggering a migration of investment capital to more business-friendly lands.

IDBI Fills the Gaps

In an effort to draw investment capital back into Iraq, The Investment Development Bank of Iraq will provide such valuable services to businesses, entrepreneurs and investors as “bank guarantees, customs facilities and other assistance pertaining to investment work,” Sami al-Araji, chairman of the National Investment Commission, informed Al-Monitor.

Economic expert Abdul Majid al-Khalidi noted that through the IDBI, the government will be “developing existing financial and banking apparatuses, refraining from putting restrictions on investment, enhancing privatization programs, doing away with bureaucracy for investment procedures and maintaining clarity and transparency to provide a true image of the investment reality in the country, alongside development of economic information technology”.

Simply put – making it safer and easier to do business in Iraq. Gone will be the current practice of “corporate executives carrying around tens of thousands of dollars in cash to settle transactions that are too inconvenient to do through the banking system”, as one banker at Monday’s financial conference in Dubai illustrated.

In addition to facilitating the needs of businesses, the IDBI will also be commissioned with financing specific infrastructure projects the country sorely needs.

Subject to parliamentary approval, the new investment bank would be given 1% of the nation’s annual budget each year for 7 years – amounting to $1.5 billion a year, or more than $10 billion by the end of the decade – to finance such infrastructure projects a potential new oil pipeline connecting Iraq’s port city of Basra westward to the Jordanian port city of Aqaba. The pipeline would greatly speed up Iraqi oil destined for Africa and Europe by eliminating the journey around the Saudi Arabian peninsula.

The IDBI would also be a major lender and provider of capital for small and medium enterprises, which the government holds as a high priority in the creation of non-oil sector jobs to diversify the Iraqi economy.

Investing Made Easier

Investors looking to get in on the Iraqi story while it is still young will soon have one more reason to do so. The eventual forming of The Investment Development Bank of Iraq – possibly to be commissioned soon after the new parliament is elected in April – will go a long way toward stabilizing banking in Iraq, as well as simplifying investments in the nation’s private economy.

Few times in history have there been such promising prospects; you would have to go back to post-WW2 Japan and Germany to find something comparable. And even then, you’d be falling short of Iraq’s ultimate potential as the leading oil producer ahead of current top producer Russia.

It’s just going to take a few years before Iraq can sort itself out and stabilize its economy, especially its internal domestic one. But if you have a decade or two to wait, there are some choices – volatile though they may be.

• Godvig Capital with offices in Luxemburg and the British Virgin Islands offers its 5-year old Babylon Fund, “an open-ended investment fund investing in relatively large-cap Iraqi-dependant securities, mainly listed on the Iraqi Stock Exchange (ISX) in Baghdad. The investment process is mainly top-down driven, with a mix of fundamental analysis and portfolio diversification characteristics.”

• FMG, a privately held investment management company founded in 1989, based in Malta and Bermuda with offices in Malta, Stamford (USA), Oslo, Stockholm and Singapore, offers its FMG Iraq Fund, “to take advantage of the growth derived from post-war reconstruction and massive oil production expansion. The FMG Iraq Fund’s main objective is to achieve long term capital appreciation by investing in locally traded Iraqi stocks and in companies that are closely associated with Iraq but traded on other markets… The fund focuses on the most liquid stocks. The investment style is predominantly long-only with no leverage.”

However, as with most “boutique” funds, FMG cautions investors that while “the relatively high risk profile can multiply invested capital over time”, it “can also cause large temporary downturns”.

Yet if you approach Iraq from the right perspective and with a multi-year time horizon, there could very well be a phoenix about to emerge from the ashes of its devastated economy.

You might even decide to pick up a few dollars’ worth of the Iraqi currency, the dinar. Just be prepared for a long wait before the money appreciates. It is still a government controlled and pegged currency, and will not trade freely for some years to come – at least while reconstruction is still ongoing.

Joseph Cafariello