ANNUAL REPORT JUNE 2010
FEDERATION OF EURO-ASIAN STOCK EXCHANGES
IRAQ STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Outlook for 2010-11
The drawdown of US forces, and the continued
weakness of central authority, may allow militia and
insurgent groups to re-establish themselves in
some areas, although violence is unlikely to return
to 2006-07 levels.
There is a growing likelihood of a realignment of
Iraqi politics, with the prime minister, Nouri al-Maliki,
as head of the State of Law list, set to run against
his former allies in the Iraqi National Alliance in the
parliamentary election in January 2010.
The role of foreign oil companies will gradually
expand, as they are drawn in by the unique
opportunity presented by Iraq's massive oil
reserves.
The Economist Intelligence Unit expects the fiscal
deficit to narrow markedly in 2010-11, to an annual
average of US$4.4bn (equivalent to 4.6% of GDP),
compared with an estimated US$9.5bn in 2009, as
oil revenue recovers.
Economic growth is likely to strengthen in 2010-11,
as foreign direct investment (FDI) in a range of oil
and infrastructure projects picks up, and improving
security boosts consumer demand and, in turn,
wholesale and retail trade.
Iraq's current account will largely track movements
in oil export receipts. Having fallen sharply in 2009,
export earnings are forecast to recover strongly in
2010, although earnings growth will be held back in
2011 as oil prices fall.
DOMESTIC POLITICS: We expect the political
situation in Iraq to remain unstable. Although the
gradual drawdown of US forces, and the
parliamentary election in January 2010, will be
accompanied by intermittent spikes in violence, we
do not expect a repeat of the sectarian conflict that
engulfed Iraq in 2006 and early 2007. However,
much will depend on the future integration of the
Sunni-dominated Awakening Councils (many of
which include former insurgents) into the state
apparatus. The prime minister has been boosted by
his Daawa Party's impressive performance in the
January 2009 provincial elections, which owed
much to his strategy of portraying himself as a
nationalist "strong man". However, this approach
has led to increased tensions between the central
government and the Kurdish parties, which will
continue to be aggravated by growing Kurdish
impatience at the failure to resolve the status of the
northern province of Kirkuk and several other
"disputed" areas. Mr Maliki's relations with other
Shia leaders are also becoming increasingly tense.
INTERNATIONAL RELATIONS: Iraq's foreign policy
will be dominated by its efforts to carve out a more
independent role for itself, in the wake of the
gradual US military withdrawal, while seeking to
balance its ties with Iran to the east and its Arab
neighbours to the south and west. The US military
presence will be reduced to 30,000-50,000 troops
by September 2010, as part of the wider drawdown
envisaged under the Status of Forces Agreement,
which provides a legal framework for a full US
military pull-out by end-2011. In the meantime,
Iraq will seek to strengthen ties with its Arab
neighbours–a strategy that it hopes will eventually
lead to new debt write-offs. However, this process
will remain hostage to security developments and
political posturing, as demonstrated by Mr Maliki's
condemnation of Syria after the Iraqi authorities
presented evidence purporting to show that those
responsible for a series of bomb attacks in
Baghdad in August were based in Syria. Elsewhere,
dealings with Iran will remain cautious, although
economic ties will continue to strengthen. Although
many of Iraq's political leaders maintain close ties to
the Islamic Republic, many Iraqis remain wary of
Iran (in part because it is widely thought to be
arming Iraqi Shia militias), which will dampen
enthusiasm for a deeper alliance.
POLICY TRENDS: Economic policymaking will be
constrained by the weakness of central government
control. As a result, the government's primary aim
will be to improve project implementation, in part by
encouraging greater local participation and cutting
bureaucratic constraints. Although progress will
remain slow and piecemeal, hindered by vested
interests, rampant corruption and the difficult fiscal
position, better security should at least allow
progress with upgrading basic services, such as
electricity and water.
INTERNATIONAL ASSUMPTIONS: We estimate that
world GDP (at purchasing power parity rates) will
have contracted by 1.3% in 2009, as the deep
recession in the EU and the US has dragged down
global growth, and expect it to expand only weakly,
by an average of 3.3%, in 2010-11, led by non-
OECD states. We forecast that the average price of
dated Brent Blend will decline in 2011, as a number
of OECD economies, including the US, experience
a slowdown that year, from US$74/barrel in 2010 to
US$70/b.
ECONOMIC GROWTH: Economic growth is
forecast to strengthen in 2010-11, having weakened
in 2009 in the wake of lower oil prices. The
improved security situation should permit a
recovery in some of Iraq's more ethnically and
religiously homogenous southern and western
provinces, leading to greater wholesale and retail
trade. In addition, FDI is also set to surge, as work
on a number of large oilfield and infrastructure
projects gathers speed. The robust economic
growth already witnessed in the more stable
Kurdistan Regional Government-administered
provinces is likely to persist, although some mixed
areas in central and eastern Iraq will continue to
experience economic stagnation. However,
government spending growth is likely to remain
relatively slow, which will have a knock-on impact
on private consumption (one-third of Iraqi workers
are employed by the state). A key area of
uncertainty will remain the agricultural sector, which
has suffered from two consecutive years of very
poor rainfall. Exports will largely track changes in oil
production. Having stagnated in 2009, as Iraq's
decrepit and deteriorating oil infrastructure held
back output growth, oil production will increase over
the forecast period. Exports from two fields in Iraqi
Kurdistan will increase (assuming difficulties
Key Information Contacts
Iraq Association of Securities Dealers: www.iasd-iq.org
Iraq Central Bank: www.cbiraq.org
PAGE 90
regarding the participation of a Norwegian oil
company, DNO, can be overcome), as will oil
production from those fields included in the first oil
licensing round. This will lift output to almost 2.8m
barrels/day (b/d) in 2011, from under 2.5m b/d in
2009. (We do not, however, expect major
production increases from fields operated by
international oil companies until 2012.) Import
growth will rise markedly, as Iraq relies heavily on
imports for both consumer goods and capital
inputs. Overall, we expect real GDP growth to rise
from an estimated 5.8% in 2009 to an annual
average of 6.4% in 2010-11.
INFLATION: Consumer price growth has been low
since early 2008, as the Central Bank of Iraq (CBI)-
overseen appreciation of the dinar, an improvement
in the supply of basic items and, more recently,
falling global commodity prices have lowered
import costs and dampened inflationary
expectations. Indeed, fast-falling fuel and transport
costs kept Iraq in deflation during most of the first
nine months of 2009. However, the government's
recent decision to assume control over vegetable
imports, and the poor harvest, has recently led to a
sharp upturn in prices, and, with the dollar
weakening, global commodity prices recovering
and, potentially, import tariffs being lifted, we
forecast that inflation will average 5.3% in 2010-11,
compared with an estimated average of just 1% this
year.
EXCHANGE RATES: The CBI has overseen a steep
appreciation of the dinar over the past two years, as
part of its anti-inflation strategy. However, with
inflation low and the dollar strengthening, the CBI
has kept the dinar steady at ID1,170:US$1 since
January, and we now forecast that this unofficial
peg will remain in place over the forecast period.
However, with lower oil prices and occasional
political shocks likely to cause intermittent
downward pressure on the dinar, we expect that the
CBI will occasionally have to dip into its substantial
stock of foreign reserves to avoid bouts of volatility.
EXTERNAL SECTOR: Iraq's current account will
largely mirror movements in oil export receipts
(which constitute some 98% of total export
earnings). Having fallen by an estimated 33% in
2009, export revenue is forecast to recover strongly
in 2010, lifted by higher oil prices and production,
although earnings growth will be held back in 2011
as oil prices fall. The import bill, meanwhile, is likely
to grow robustly, led by rising demand for capital
inputs and consumer goods. Nevertheless, we
expect the trade surplus to widen markedly in 2010,
from an estimated US$3.4bn (4.6% of GDP) in 2009
to US$7.3bn, before narrowing to US$2.6bn in
2011. The non-merchandise deficit will widen
steadily over the forecast period, as services debits
increase in line with import spending. Overall, the
current account, which we estimate will have
recorded a small deficit in 2009, is forecast to
record a surplus of US$3.5bn (3.8% of GDP) in
2010, on the back of sharply higher oil earnings.
The current account is expected to slip back into
deficit in 2011, however, as export growth slows.*
* The Economist Intelligence Unit Limited