Politics Undermining Investment Outlook
BMI View: We project Iraq's current account to come in surplus to the tune of US$28.3bn in 2012 and US$31.0bn in 2013, representing 20.4% and 18.6% of GDP, respectively. The trade balance will remain firmly in the black, owing to rapidly increasing oil exports. However, due to political in-fighting between the central and Kurdistan regional governments, foreign investment in the oil sector will remain below potential.
We forecast Iraq's current account to come in surplus to the tune of US$28.3bn in 2012 and US$31.0bn in 2013, representing 20.4% and 18.6% of GDP, respectively. This is primarily the result of a rapid increase in oil exports, which will offset a pronounced rise in imports. While we expect foreign direct investment inflows to remain robust over the forecast period, FDI will likely be below potential given ongoing challenges for oil companies that are arising due to tensions between the central and regional governments.
|External Position To Remain Solid|
|Iraq - Components Of Current Account (US$bn) & Current Account Balance|
As a result of Iraq's burgeoning current account surplus and robust FDI inflows, our forecasts see the country's net international investment position continuing to strengthen going forward. To be sure, the bank's net foreign assets stood at US$63.0bn in June, having grown 20.1% y-o-y, and up from US$58.7bn in January. This will provide an ample buffer in the event of any downward price shocks to global energy prices, which cannot be ruled out given the fragile state of the global economy at present.
|Building Up Reserves|
|Iraq - Foreign Currency Reserves|
Oil Exports Are Key
The burgeoning current account surplus in 2012 and 2013 will be underpinned by a forecast 14.9% and 19.1% increase in the value of oil exports (which comprised 99.7% of total exports in 2011), respectively. The increase in 2012 largely results from our forecast for oil production to increase 13.2% y-o-y, while we see OPEC basket oil prices remaining high by historical standards, averaging US$107.05/bbl. Indeed, according to the Organization of Petroleum Exporting Countries (OPEC), Iraqi oil production came at 3.079mn bbl/day in July, increasing 14.9% y-o-y. As a result, Iraq surpassed Iran to become OPEC's second largest oil producer.
Imports Increasing Steadily
We see imports continuing to grow at a rapid pace, as the country's weak non-oil production capacity will not meet the demand for capital and consumers goods ( see our online service, August 15, 'All About Oil?'). To be sure, imports from Turkey, Iran and the United states reportedly grew 37.6%, 50.0% and 48.0% in nominal terms last year, respectively. As a result, manufactured goods imports (which comprised 27.2% of total imports in 2011) and imports of machinery and transport equipment (making up 38.5% of total imports in 2011) will grow at a particularly rapid pace. For instance, reports see an increasing number of cars being sold in Iraq, with Arabian Automobiles, a distributor of Nissan and Infiniti cars, seeing Iraq as one of the fastest expanding markets in the MENA region. In addition, in June a deal was negotiated for the supply of armoured vehicles to Iraq from Bulgaria, which was valued at US$184.2bn. Moreover, as a result of Iraq's antiquated power generation infrastructure, imported electricity is also likely to remain relatively elevated over the coming years. We forecast total imports growing 19% and 25% in 2012 and 2013, respectively.
|A Solid Outlook|
|Iraq - Components of Trade Balance|
FDI Growing, Although Below Potential
Iraq's National Investment Commission (NIC) expects capital investment with foreign participation to come in at US$100bn in 2012, an increase of approximately 50% y-o-y. Indeed, recent developments bode well for attracting greater numbers of foreign investors. The NIC is working to improve the clarity of land ownership laws (property has often been seized in Iraq over the last decade), while restrictions for foreign investors in certain sectors such as healthcare (particularly restrictions on investments in hospitals) have recently been removed. That said, although foreign investment will grow at a rapid pace, political infighting and an uncertain regulatory framework will continue to undermine FDI inflows in our view. In terms of the oil sector, political infighting between Baghdad and Erbil (the capital of the autonomous Kurdistan region), is undermining the government's ability to pass a long-awaited oil revenue sharing law.
As a result, the federal government considers it illegal for foreign oil companies to sign contracts with the Kurdistan region without its consent (see August 9, 'Increasing Political Uncertainty Hinders Transition'). In the latest development, which took place in mid-August, the federal government warned France's oil major Total that it must freeze any energy deals with Erbil, or sell its stake in the country's Halfaya oilfield in Southern Iraq. Going forward, we believe that more companies will sign deals with Kurdistan, following the examples of oil majors such as Shell and Chevron, along with Total. Although contracts with the central government will likely become more profitable over the next few years as Baghdad seeks to attract greater numbers of investors, the next bidding round for explorations in Iraq is only planned to take place at the end of 2012 or early 2013.