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Tabaqchali: "Revisiting the Iraq Thesis, Five Years Later"

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Tabaqchali: "Revisiting the Iraq Thesis, Five Years Later"

7th July 2020 in Ahmed Tabaqchali, Investment


The known nature of COVID-19 and the emerging, slow and un-synchronized recovery from the global lockdown, continuous to argue for oil prices, to average in the range of $30-40 per barrel for Brent crude for 2020, $45-55 per barrel for 2021.

This means that Iraq cannot avoid embarking on real economic reforms.

This is exactly what the new government, formed in May, is pursuing and as articulated by the Minister of Finance, these reforms include a fundamental retooling of the budget's structural imbalances.

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.

One of the first measures of the reform initiative supports this line of thinking in that the Central Bank of Iraq (CBI) introduced regulations that would allow commercial banks to provide letters of credit for government entities - a step that could lead to the erosion of the monopoly of the state banks
, that in 2018 accounted for 81% and 86% of banking loans and deposits respectively, and which are mostly with the government.

In the short term, these measures would provide qualified banks with fee income to boost their earnings, eventually grow their deposit base as they develop their government businesses, in the process attract more private sector deposits, which ultimately would support their lending activities.

More such low key, yet implementable measures are likely to be introduced over the next few months.

Coupled with these would likely be measures that would remove some of the stifling regulations that hinder the private sector.

While such measures will not attract many headlines, and each on its own might not seem to be significant, their cumulative effects would be extremely positive for the banking sector.

The first to feel these effects would be the earnings and book values of the ISX's listed banking sector, which given that the sector was one of the worst effected in the multi-year brutal bear market, these in turn would have outsized effects on the sector's equity returns.

Consequently, these would in turn impact the whole market positively given the sector's major weighting in the market's trading activity.

June was a low-key month as the re-imposed two-week curfew on May 31st to contain the latest increase in COVID-19 cases meant that the Iraq Stock Exchange (ISX) resumed trading on June 14th, following its last trading day on May 21st - which preceded the Eid-break.

The ISX returned to its five-day a-week trading schedule, but the government's newly imposed rolling curfews on Thursday-Saturday as part of its COVID-19 containment efforts meant that the five-day working week has been cut down by one day, to Sunday-Wednesday.

Nevertheless, that still means a 33% increase in trading activity, and although turnover was still low, the ISX continued its recovery from the April lows, up 5.1% for the month.

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

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