Iraq’s Reconstructed Bond Argument
The Iraqi Prime Minister began a US visit as post-military pullout security already suffering from regular Baghdad bombings was aggravated by Iran, Syria and Kurdish region tensions, amid talk of a return to international bond markets following the Saddam-era $3 billion restructuring to boost oil production above the current 3 million barrels/day. Yields for the EMBI-included illiquid instrument had improved 150 basis points the past year on exotic uncorrelated demand and a tentative revenue-sharing formula for petroleum exports accounting for 60 percent of GDP with the regional Kurdistan government. Economic growth aided by agriculture and construction will be 3 percent this year as the current account surplus is halved to 5.5 percent of GDP, but the budget has gone into deficit as the break-even oil price rises to $110 per barrel. State bank and enterprise privatization has been stuck over coalition bickering as foreign houses had begun to reconsider a local presence after the brief 2012 violence lull and a breakthrough telecoms listing on the stock exchange. With $75 billion in reserves future bond servicing should be covered but the political and geopolitical risks may indefinitely delay a fresh conventional appeal and the sovereign could instead tap a Mideast base through the sukuk route. Relations with next-door Iran have long been strained and the commercial and military context has been muddied by pragmatic signals from the new President Rowhani on economic policy and nuclear enrichment. Global sanctions caused an estimated 5 percent output contraction the past fiscal year on 50 percent-plus inflation based on the parallel exchange rate still over 5000 rial below the official 25,000 to the dollar. Foreign reserves have dipped to $75 billion or 10 months’ imports as crude oil proceeds are blocked in bank accounts abroad, and the budget deficit has swelled to 5 percent of GDP and technocrats appointed to the cabinet have indicated that means-tested subsidy reform is a top savings priority. The Supreme Leader Khamenei endorsed initial cuts in food and fuel support in the last year of the outgoing regime but adjustments were overwhelmed by the rising boycott costs, which forced borrowing from state pension and religious funds to meet obligations as middle-class protest surfaced and the Tehran stock market reeled from retail flight.
Libya has a tiny dormant exchange that drew business delegation interest in the aftermath of Qaddafhi’s ouster, but direct and portfolio investors have since been scared away by the lawlessness in major cities and basic government instability, as militia members recently kidnapped the prime minister to press wage demands. Oil facilities have gone idle and fallen into disrepair with hydrocarbon production off 20 percent from last year’s reactivation. The eastern region seeks autonomy and labor strikes are widespread, but the sovereign wealth fund is twice the economy’s size at $150 billion with managers still trying to reconstruct the holding and fee trail from the original gusher.
