Giant fluorescent love hearts arching over Baghdad’s Zawraa Park touched Ahmed Tabaqchali, three thousand miles away in London.
The Valentine’s Day photos sent by his friends on WhatsApp displayed more than sentimental romance. This was defiance.
“Iraq is a country that had always been very open and tolerant,” says Tabaqchali. “And now the people have a sense of power over the politicians. They’re claiming back their world.”
Tabaqchali is an optimist for his country. He has to be. A career capital-markets professional in the UK, US, Middle East and North Africa, he’s just started a dedicated Iraq investment fund.
It’s part of Asia Frontier Capital, which spreads its assets across 11 frontier markets and counts Marc Faber among its shareholders.
His timing is questionable. Oil, which accounts for over 90% of government revenue, may be recovering but few would be brave enough to predict a return to the prices of recent years. From somewhere, the state must find the resources to fight Islamic State, aid millions of citizens displaced by conflict and rebuild its cities.
Efforts to overcome these challenges are dogged by mountainous bureaucracy and a network of corruption that has spirited away much of the nation’s oil wealth.
Chronology of Cruelty
Yet throughout his adult life, Iraq has rarely been a bed of roses, reflects 57-year-old Tabaqchali. Somehow, people have had the resilience to muddle through.
“Iraq has been completely destroyed over the past 35 years of conflict,” he says on the Emerging Opportunities show on Share Radio this week. “And we’re not talking just conflict, we’re talking mega-conflict.”
Equivalent in local terms to the First World War, Iraq’s eight-year battle with Iran in the 1980s claimed a million lives from the two nations. Before those wounds could heal, Saddam Hussein invaded Kuwait. The country’s infrastructure was completely destroyed by the first Bush administration’s military response.
“Savage, cruel sanctions” crippled the economy over the next 14 years, recalls Tabaqchali. Then after the third Gulf War in 2003, sectarian fighting in 2006 almost ripped the country apart.
After barely five years in recovery, Iraq was ravaged by Islamic State in a conflict that displaced nearly a tenth of the population and severely dislocated resources as a third of the territory became part of the caliphate. Next came the plunge in oil prices.
Iraq – concluded the Fitch credit ratings agency – has some of the highest risks of any nation. Debt levels doubled to 70% of gross domestic product this year from just 32% two years ago as the economy barely grew.
“Iraq is a country that has a huge risk attached to it,” Tabaqchali acknowledges. “Yet perceived risk is substantially higher than actual risk.”
While the price Iraq earns for every barrel of oil has been plummeting, production climbed by 10% and exports by 16% last year. The pace of growth will double this year for output and sales will jump 26%, he says.
With the world’s fifth largest proven oil reserves, a relative lack of exploration means the potential amount could be as vast as Saudi Arabia’s, according to Tabaqchali.
What both countries have in common is extracting oil is relatively cheap because it’s so close to the surface. At a cost of between $2-5 a barrel for production, the country is better placed than most crude exporters to weather a prolonged price slump.
In a country surrounded by anti-Western terror threats – and where electricity outages sparked mass street demonstrations in the 50-degree heat as air-conditioning units shut down – the local Pepsi bottler was so convinced its drinks would get to refrigerated stores, it added a new production line last year. Sales rose 14% and operating profit jumped 60% for Baghdad Soft Drinks.
Amid the country’s crumbling infrastructure, mobile penetration is at 90%. Iraqis finally received 3G signals last year. Conversion rates were around 25% by the third quarter of 2015, phone companies reported.
Banks are another industry favored by Tabaqchali because of the potential for expansion. Less than a fifth of Iraqis have bank accounts. Loans are equivalent to only 26% of deposits for the group of banks he follows.
The biggest risk by far is the continued threat from Islamic State.
“It is a serious risk, it cannot be understated,” says Tabaqchali. “However, Islamic State didn’t emerge out of nowhere. It emerged out of a population that was antagonized and disenfranchised.”
Before Islamic State rose to prominence, the country was divided by regional proxy wars between the US, Saudi Arabia and Iran. Islamic State’s insurgency focused the world’s attention.
“It’s like the pinnacle of the war between the US and Iran,” says Tabaqchali. “Now, we have Iran back in the fold, I believe one of the surprises of 2016 will be how quickly Islamic State – the caliphate itself – will fall apart.”
Just as Iraq has suffered from falling oil revenue, so too has Islamic State as it’s estimated to receive more than a quarter of revenue from selling crude. The rest comes from taxes, confiscations and looting – which had been increasing with the caliphate’s expansion. But now Islamic State is in retreat.
It’s been seeking to save costs by halving wages to foreign fighters – but it’s unlikely to sustain its mercenaries while lowering inducements.
“There’s only so much more they can brutalize a population that they’ve already brutalized to raise more money,” says Tabaqchali.
Islamic State’s growing desperation is evidenced by its readiness to claim responsibility for any terror attacks, whether organized by the top command or renegade random shooters in American schools.
While debt has ballooned relative to GDP, in absolute terms Iraq hasn’t added to its foreign borrowing in four years. There was talk of Iraq tapping the market for more funds at the end of last year, but the government pulled back as investor concern over tumbling oil prices sent yields climbing.
Iraq’s only international government bond has lost about a fifth of its value in the past six months.
“Pressure is beginning to build,” Stuart Culverhouse, head of research at the frontier and illiquid markets firm, Exotix Partners, says on the same radio show. “Clearly the financing needs now are vast and there’s an uncertainty about how they’re going to be filled or how big is the policy adjustment going to be if they can’t raise the money, and that’s a huge issue.”
Even Tabaqchali cautions that investors need be braced for a rough ride – and be prepared to wait seven to ten years.
“To even the most sophisticated and the most able, I would say invest only a small amount, because with the return you have a risk. That has not been eliminated, sadly, in the real world.”
Still, that doesn’t lessen his conviction.
“People have survived through such terrible times, I’m constantly amazed by the human spirit,” says Tabaqchali. “Right now – finally – all the stars are aligned for Iraq to truly recover.”