Foreign Exchange

Iraq, torn by war and strife, is slowly drawing the notice of investors

Flames emerge from a pipeline at the oil fields in Basra, southeast of Baghdad, Iraq, October 14, 2016.
Essam Al-Sudani | Reuters

One of the most unstable countries in the world also happens to have the distinction of being one of the fastest growing economies in the world.

Believe it or not, Iraq — riven as it is by terrorist insurgency and civil strife — is expected to grow by a sizzling 7.2 percent this year, according to World Bank data. It recovered from a brutal 9 percent contraction in 2015 and is outpacing the Middle East's average economic growth of 3 percent. And while it may seem unthinkable for now, investors say Iraq could eventually be positioned to become a magnet for investor capital — and it may arrive sooner than many people think.

For now, the country remains in the throes of a major offensive to root out ISIS extremists that have laid siege to entire swaths of Iraq. However, analysts point to structural factors bolstering the battered OPEC nation's recovery — including a recovery in the bear market for oil.

Given that its peers in the Gulf (Saudi Arabia, for example) relied too heavily on triple-digit oil prices to support their domestic budgets, Iraq appears poised to navigate cheaper oil prices better than others in the region, even as it recently obtained a $5.4 billion International Monetary Fund loan to boost stability.

"Oil at $30 was devastating for a growing country like Iraq, especially coming down from above $100," Shwan Taha, founder of Rabee Securities, a brokerage headquartered in Baghdad told CNBC recently.

At current levels under $50, however, "it is a good price to give a breather and also not to cause the population to be dependent on it," Taha added. "The economy has to work to grow."

Although Iraq has the natural resources to meet some of the criteria for emerging market status, on others it is still quite far away. We think it could take a decade or more before this would become a real discussion.
Alan Cameron
economist, Exotix Partners
Phototreat | iStock/360 | Getty Images

The IMF package can be seen as a badge of credibility that somewhat elevates Iraq from pariah status in the eyes of investors, some say, and comes at a time when the country's fundamentals are showing resilience.

"Fiscal consolidation, including a freeze in nominal spending, has been delivered and oil exports from the South have surprised on the upside," said Stuart Culverhouse, head of research at Exotix Partners, a London-based investment firm that specializes in emerging markets.

Exotix has been advising clients to buy Iraq's bonds, which have been rallying for much of the year to levels not seen in more than a year, when oil was priced above $65 per barrel. A number of blue chip wealth managers, hedge funds and smaller investors have been buyers.

In addition, Iraq's debt is likely to fall below 79 percent of gross domestic product this year, according to Exotix, while payment delays to international oil companies have been shortened from 220 days to 120 — and may fall further.

Still a ways off

Meanwhile, the "Trump rally" that has carried the to 13-year highs is a source for concern because emerging markets may be forced to pay higher debt costs with weaker currencies. Since President-elect Donald Trump was swept to power earlier this month, the dollar has been on a tear against nearly all major and emerging market currencies.

"The election of Donald Trump is a double-edged sword for Iraq, in our view," said Alan Cameron, London-based economist with Exotix Partners. "On the other hand, if American involvement in foreign conflict and support for allies in the Middle East diminishes, then the fights against ISIS may be compromised, which would be very negative for Iraq."

Iraq, when looking at oil reserves, capacity, its fertile land and agricultural potential, should be ripe for investment and development but the realization of this remains a ways off.

"Although Iraq has the natural resources to meet some of the criteria for emerging market status, on others it is still quite far away. We think it could take a decade or more before this would become a real discussion," Cameron said.

Iraq is indeed an opportunity, analysts say, but for the moment investors are still scared off by headlines about bombs, ISIS and bloodshed.

"We are currently not seeing any real buying while there is so much turmoil going on inside the country," said David Grayson, co-founder and CEO of Auerbach Grayson, a New York City–based international brokerage firm. "Companies that will do well when things become normalized are the banks, and any company that will benefit from the rebuilding plus consumer goods," he added.

Although lower oil prices have depressed the oil-dependent economies, Grayson explained that low oil has not necessarily dampened investor interest in the region. "We still see many of our institutional investors seeing value oriented companies in non-oil related sectors," he said. "In particular, if Saudi Arabia finally opens up to foreign investment without restriction, you will see a lot of buying there."