Iraq?s Political and Economic Climate: Obstacles to Debt Recovery

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Iraq?s struggles, politically and economically have inevitably led to financial struggles and debt.

The investor?s take

As Iraq?s hydrocarbon industry is supported by international investors from oil companies. Its high amount of debt interferes with encouraging international oil companies to invest in the countries rich resources.

Due to the U.S. invasion of Iraq and the toppling of Saddam Hussein, the Paris Club, a group of western creditors, decided to cut off about 80% of the debt owed to them from a total of $37.2 billion owed to them. The deal has served as a framework to resolve Iraq?s transactions with other countries.


Senior economist at London-based Exotix, Gabriel Sterne, forecasts Iraq?s debt to gross domestic product ratio will be less than 40 per cent by the end of 2011, compared with 552 per cent before the Paris Club agreement creating a ?firmly sustainable footing? for the countries public and external debts. Public and external debt is heading towards a ?firmly sustainable footing?.

Daniel Broby, chief investment officer at London-based Silk Invest, admits that despite all the turmoil Iraq seems to be, ?getting back on its feet. But the yield just isn?t attractive enough.? The risks involved deter foreign involvement with the country?s industry. Silk Invests has recorded the yield on Iraq?s bond as 6.7%, which is not very encouraging.

Along with that, Broby point out the bilateral debt Iraq owes mainly to Kuwait and Saudi Arabia must also be taken into consideration, although neither country is in enforcing it on their Arab neighbor.


However, Sterne additionally states that, ?With oil revenues buoyant and production volumes set to increase, we still think the risk-reward trade-off is acceptable on the Eurobonds.? In fact, based on a citing by Waleed Eedi, a director-general at the central bank of Iraq, the country may be able to sell its first bond since 2006, by next year, and its total debt would fall to $40bn compared with $135bn eight years ago.

There is also hope to boost Iraq?s oil output to 12 barrels a day, an ambitious outlook, considering its current output of 2.6 b/d. Despite the skepticism that this goal has gained, the International Monetary Fund has estimated a 9.6% economic growth to take place in Iraq this year, and 12.6% in 2012, fueled by increased oil production. In the next two years, inflation is forecast at 5%.

Sherif Salem, portfolio manager at Invest AD, states that, ?It?s going to be a bumpy road in the short term but in the longer term, given Iraq?s importance, it is in people?s interests that Iraq gets through this.? Political stability would be a necessity in order to boost oil production and reach Iraq?s goals. Therefore, negotiations on the presence of U.S. troops in Iraq is highly critical.

Iraq?s recovery

Earlier this year, the Austrian Oil company OMV, discovered oil in Iraqi Kurdistan. The Canadian oil and gas exploration company, WesternZagros, had also discovered oil in the same region, being the third oil strike this year after the US oil firms, Aspect Energy and Marathon Oil found oil around the same region, in April. OMV? is also partly owned by an Abu Dhabi fund, and its output will lead to profits for the investors.

Iraq has been on a gradual road to recovery. In 2010 Bloomberg reported the increasing profits of banks based in Iraq. The Dar Es Salaam Investment Bank ?stated that its profits grew from $600,000 in 2004 to $16 million. Oil-field contracts were also drawn with various organizations, including BP Plc, Exxon Mobil Corp. and China National Petroleum.

At the same time Ali Allawi, a former finance minister stated that fficials ?were raised in a statist environment. They don?t see the connection between private-sector investment and reducing unemployment.? A byproduct of the government?s focus on oil is that it isn?t motivating private investment. Iraq Oil Minister Hussein al-Shahristani, keeps a possible hold on the idea that the oil fields will generate several thousand jobs for Iraqis.

Analysts hold different opinions on Iraq?s progress in rising out of a pot-hole of debt. Every nation suffers from ups and downs, with the aid and co-operation from various investors within and outside the country, its economic recovery could be close at hand.

Sources: Dinar Daddy?s titbits, Financial Times, Bloomberg, The National

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