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Investors Look for Opportunities in Iraqi Recovery

The thought of investing in Iraq may make some investors cringe, but others argue the situation is changing on the ground. Given the euro zone debt jitters, a weaker outlook for the US economy and fears of some emerging markets overheating, it may be worth a consideration.

Soldiers from Task Force Currahee, 4th Brigade, 101st Airborne Division, recover bundles of fuel that were air delivered to Forward Operating Base Waza K'wah in the Paktika province of Afghanistan via a C-17 Globemaster III. The fuel was delivered to help sustain members of Task Force Currahee whose only means of re-supply is through air delivery.
Source: U.S. Air Force Photo | Master Sgt. Adrian Cadiz

As the debate rages on as to whether some US troops should remain after a planned withdrawal at the end of the year, the security situation is still volatile. A top US official earlier said that Iraq “is less safe than a year ago”. Figures released by the health ministry showed that the number of civilians killed by violence in the country rose to 159 in July, marking one of the worst months of the year. 

But Shwan Taha, owner of Rabee Securities, believes it is now “much better” in comparison to 2005-2007.

“There are much more dangerous places on earth that investors are flocking to and where the rewards are less than those in Iraq,” he told CNBC.

Here are some numbers to ruminate on. The 10-year sovereign bond yields for Iraq, at 6.65 percent, are roughly on par with Italy and Spain, and lower than Ireland and Portugal. Similar patterns can be found in Iraq’s credit default swaps (CDS), or the cost of insuring the country’s debt against default for five years.

And the violence “does not seem to be having any effect on foreign direct investment (FDI), which is increasing, substantially,” Hussain Qaragholi, managing partner at Phoenix Capital and vice president of the US Business Council in Iraq (USBCI), told CNBC in an interview.

FDI into Iraq increased by 175 percent in 2010, data from fDiIntelligence showed. The country took 7 percent of FDI flows into the Middle East region in 2010, up from 2 percent in 2009, becoming the fourth leading destination in the region.

Dunia Frontier Consultants, a financial services company, estimates some $45.6 billion in investments flowed into Iraq in the first half of 2011, already surpassing the total for 2010.

You can see the impact everywhere. The Iraq Stock Exchange (ISX) is up more than 40 percent so far this year, making it one of the best performing markets in the world - compared to the Egyptian Stock Exchange, down 35 percent year-to-date. Trading is often thin, but greater prospects may be around the corner.

Qaragholi looks forward to the listing of Iraq’s telecom initial public offerings, possibly doubling or tripling the market value of the stock exchange, currently just above $4 billion. It is a modest number, even by regional standards.

A substantial amount of investment goes into the oil and gas sector. Iraq is a member of the Organization of Petroleum Exporting Countries, not bound by quotas, and currently exports 2.7 million barrels per day (bpd). The plan is to expand output to 3 million bpd by the end of the year, and 12 million bpd by 2017.

A final draft agreement was signed earlier in Julyby the government with Royal Dutch Shell and Mitsubishi, paving the way for a $12 billion deal to capture flared gas in the south.

Aside from oil and gas, what else is out there? Taha said he is very interested in the services sectors. “Personally I try to stay away from the flavor of the month and look a bit more long term,” he said.