AFC Iraq Fund Ahmed Tabaqchali Asia Frontier Capital (AFC) Breaking Featured Investment

Market Review: “Feast or Famine”

Market Review: "Feast or Famine"

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

Any opinions expressed are these of the writer, and don’t essentially mirror the views of Iraq Enterprise Information.

The uncertainty that has prevailed over all financial exercise throughout the previous few months is lastly coming to an finish in a typical Iraqi fashion- extremes of both feast or famine. The parliamentary elections in Might, having yielded no clear winner, led to a multi-month paralysis throughout which the election outcomes have been contested in courtroom, subsequently resulting in a partial recount of the votes.

Growing the election nervousness have been large demonstrations in Basra and the southern governorates, the place residents demanded reform and funding into primary providers, and the proverbial shaking of the political class by elevating fears that they might unfold all through the nation. Ideas on the protest motion and its implications are additional mentioned in, (The Protest Motion, the Politicians and the Elections).

The top of the uncertainty got here in early October with the appointment of a president, and a primary minister in fast succession. This was finished at a velocity virtually remarkable in post-2003 Iraq. Whereas the people are two of Iraq’s most completed politicians with plenty of promise, the essential takeaway is that the method of choosing them broke the mould and ended the political gridlock that bedevilled the nation since 2003.

This was a continuation of the consequences of the identical 2015 protest motion that had such a profound impact on how the elections have been fought and their subsequent outcomes. Probably the most seen impact was the fragmentation of the prior ethno-sectarian monolithic blocs that dominated over the previous 14 years, the basis explanation for Iraq’s political and social instability since 2003. It’s the finish of this gridlock that holds the promise for change in Iraq and with it begins the unlocking of the huge reconstruction drive that lies on the coronary heart of the Iraq funding alternative.

That is made considerably simpler for the upcoming new authorities because the windfall from larger oil costs (based mostly on the year-to-date common Iraqi oil worth of USD 65/bbl) might suggest that Iraq would have a two-year cumulative surplus of USD 24.5bn, or the equal of a 19% stimulus for non-oil GDP by the top of 2018. Conservative assumptions for Iraqi oil costs for 2019 of USD 59/bbl would suggest an extra surplus of USD 9.3bn by finish of 2019, but when Iraqi oil costs have been to stay on the present common worth then the 2019 surplus might simply double to USD 18.6bn.

The implications of a three-year cumulative surplus of USD 33.Eight – 43.1bn by finish 2019 are monumental for Iraq’s means to plan the funding of the reconstruction and to deal with the nation’s structural imbalances. The assumptions above don’t assume that the present rally in oil costs is sustainable, however that Brent would stabilize at about USD 65-70/bbl from the present USD 84+/bbl (Iraqi oil tends to promote at a reduction of USD 5/bbl).

Nevertheless, that is no less than a number of months away as the brand new authorities is unlikely to be shaped earlier than the center of November and as such wouldn’t have the ability to take any motion earlier than yr finish. Provided that, the county is within the mildest of the 40-day Arbaeen pilgrimage, the timing of the brand new authorities’s spending programme would coincide with the return of exercise following the Arbaeen pilgrimage -hence the sooner reference to the extremes of feast or famine for Iraq’s financial system.

The market adopted by way of with its longer-term bottoming course of because the July interim backside continued to be examined this month, in-line with the identical development seen in August and can doubtless proceed for a while. The market, as measured by the Rabee Securities RSISUSD Index was down -Four.Eight% for the month and -10.5% for the yr. Common every day turnover declined considerably for the month to the bottom ranges (by a large margin) for quite a lot of years as might be seen from the chart under.

Common every day turnover Index (inexperienced) vs RSISUSD Index (purple)

(Supply: Iraq Inventory Change, Rabee Securities, Asia Frontier Capital)

The poor market motion over the summer time months ought to be seen within the perspective of the low turnover coupled with the continuation of the demonstrations that started in July, the extended uncertainty over the governments formation and eventually the 40-day Arbaeen pilgrimage that brings the nation to a standstill as tens of millions of pilgrims participate in “the largest annual gathering of people anywhere on earth.”

Nevertheless, the low exercise was not with out fireworks as a sell-off by a overseas investor in Mansour Financial institution (BMNS) set off a frenzy of buying and selling exercise in a replay of the sell-off within the Financial institution of Baghdad (BBOB), as reported in July’s replace “Of Frenzies & Market Bottoms”. On the worst level BMNS, was down -40% for the month and its market capitalization was equal to about zero.5x E-book Worth, 17% of belongings and 22% of money (based mostly on trailing 12-month numbers). In a precise replay of the occasions with BBOB, as soon as the place was liquidated locals and another foreigners purchased the inventory which despatched it up +27% to finish the month down -24%, and -10% for the yr.

Nevertheless, the monetary place of BMNS in the course of the previous few troublesome years is nearly the mirror reverse of BBOB. BBOB suffered from the identical forces that crushed the sector’s earnings, as reviewed in (Of Banks and Price range Surpluses), along with its share of firm particular points and structural weaknesses that have been uncovered by the pains of 2014-2017, together with the current strain on FX margins. BMNS however, weathered the storm principally unscathed as seen under, and particularly it’s in a robust place to reap the rewards of a restoration given its robust deposit progress, low mortgage/deposit ratio, and low ratio of non-performing loans (NPL’s) to deposits.

As defined “Of Banks and Budget Surpluses”, the banks’ leverage to the financial system crushed their earnings. Particularly, the double whammy of the ISIS battle and the collapse in oil costs squeezed authorities funds as bills soared whereas revenues plummeted. The federal government resorted to dramatic cuts to expenditures by cancelling capital spending and investments which, because of the centrality of its position within the financial system, led to year-year declines in non-oil GDP of -Three.9%, -9.6% and -Eight.1% for 2014, 2015 and 2016, respectively. Finally, the federal government had a cumulative deficit of round USD 41bn throughout this era and amassed vital arrears to the personal sector within the course of.

The identical leverage ought to work in reverse because the potential price range surpluses of USD 33.Eight – 43.1bn for 2017-2019 ought to have a simulative results on financial exercise which finally ought to translate to stronger future earnings for the banks. These have been mentioned in additional particulars in: “Forget the Donations, Stupid.”

BMNS’ monetary efficiency through the years of battle may be seen by way of the three charts under that take a look at loans/non-performing loans (NPL’s), deposits and commerce finance and their affiliation with finances surpluses/deficits. BMNS’ mortgage and NPL knowledge as provided by the analysis staff at Rabee Securities is gratefully acknowledged, whereas different knowledge was taken from the Central Financial institution of Iraq. Knowledge from 2010-2014 are based mostly on Iraqi accounting requirements, whereas knowledge from 2015-2017 are based mostly on IFRS, and all calculations makes use of the official USD/IQD change fee.

BMNS’ mortgage e-book progress peaked in 2015 on the similar time that NPL’s peaked. In contrast to many different banks within the sector, its mortgage e-book was virtually flat throughout 2015-2017 and NPL’s as a proportion of loans declined by virtually 50%. On the similar time BMNS elevated its provisions considerably at virtually twice the NPL’s in 2017.

Mansour Financial institution: Loans & NPL’s 2011-2017

(Supply: Central Financial institution of Iraq (CBI), Rabee Analysis, Asia Frontier Capital (AFC))

In contrast to, virtually all different banks within the sector, BMNS skilled deposit progress all through the disaster with progress accelerating through the relative stability in 2017. A flat mortgage guide and sharply growing deposits resulted in a really low mortgage/deposit ratio permitting BMNS the chance to develop its loans ebook. Furthermore, most of those loans are collateralized by property as most banks’ loans are in Iraq the place the norm is for collateral worth at 2x the mortgage.

Mansour Financial institution: Deposits and Mortgage/Deposit ratio 2011-2017

(Supply: Central Financial institution of Iraq (CBI), Rabee Analysis, Asia Frontier Capital (AFC))

BMNS’ commerce finance declined, nevertheless, at a lot decrease charges than these skilled by the sector, whereas the injury to BMNS’ earnings was mitigated by the comparatively small measurement of the enterprise.

Mansour Financial institution: Commerce Finance 2011-2017

(Supply: Central Financial institution of Iraq (CBI), Asia Frontier Capital (AFC))

It’s logical to conclude that the ocean change which has taken place within the authorities’s monetary well being would reverse the tendencies that affected the banking sector’s earnings as the numerous stimulus to non-oil GDP ought to result in sustainable financial exercise which ought to present the sector with room to recuperate. Given BMNS’ robust place relative to different banks, it ought to have a chance to develop a lot quicker than the sector as an entire.

Please click on right here to obtain Ahmed Tabaqchali’s full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an skilled capital markets skilled with over 25 years’ expertise in US and MENA markets. He’s a non-resident Fellow on the Institute of Regional and Worldwide Research (IRIS) on the American College of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He’s a board member of the Credit score Financial institution of Iraq.

His feedback, opinions and analyses are private views and are meant to be for informational functions and basic curiosity solely and shouldn’t be construed as particular person funding recommendation or a suggestion or solicitation to purchase, promote or maintain any fund or safety or to undertake any funding technique. It doesn’t represent authorized or tax or funding recommendation. The knowledge offered on this materials is compiled from sources which might be believed to be dependable, however no assure is made from its correctness, is rendered as at publication date and should change with out discover and it isn’t meant as an entire evaluation of each materials reality relating to Iraq, the area, market or funding.

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