Iraq Business Forecast Report Q3 2010

Bright Growth Outlook Despite Political Impasse ; In spite of the delays in the formation of a new Iraqi government following March 7’s national elections, we maintain our sanguine outlook on the economy. Indeed, we believe that regardless of the formation of the next government, Baghdad will remain welcoming to foreign companies, and increasingly those in sectors other than just oil and gas. As such, we have kept our GDP forecasts for Iraq broadly unchanged this quarter: between 2010 and 2014, we are pencilling in average growth of 5.6% per annum. We see real growth coming in at a relatively subdued 3.8% and 4.5% in 2010 and 2011 respectively, before expansion accelerates towards the end of the five-year forecast period on the back of increases in oil production capacity.

At the time of going to print, over two months on from March’s polls, Iraq still does not have a new government. With the process of political horse trading still ongoing, in this report we outline three scenarios for coalition forming. Although we expect Baghdad to remain open to investment whoever is in charge, the eventual make up of the new government could have implications for long-term stability.

One path could lead to faster Sunni-Shi’a reconciliation and in turn enhanced political stability, while another could entrench Sunni disenfranchisement and potentially result in an uptick in sectarian violence. The third scenario, a government of national unity, would be unstable and liable to collapse.

For the foreseeable future, the cornerstone of the Iraqi economy will remain the oil sector. We stand by our view that given the multitude of challenges facing international oil companies in Iraq, realised production levels will come in far short of Baghdad’s targets. That said, output will still rise considerably over the coming years which, combined with our relatively bullish long-term oil price projections, should help to drive both oil sector and non-oil sector growth. As the government is the primary beneficiary of oil revenues, the public sector will be the primary driver of this non-oil growth. In addition, planned investment in infrastructure, particularly in electricity provision, should eventually help to boost private sector growth.

The improvements in the security situation mean that Iraq is now an increasingly viable investment destination, and Baghdad is keen to welcome in foreign businesses. Indeed, Iraq is luring greater numbers of foreign companies, and not just into the oil sector. For example, Emirates and Qatar Airways have recently announced plans to start up services to Iraq, and French shipping line CMA CGM is set to operate a renovated berth at the Iraqi port of Umm Qasr. Currency stability and a low inflation environment, both of which we expect to persist through the forecast period, are further factors that should enhance the business environment. However, investors must be prepared for a myriad of challenges, including endemic corruption, poor infrastructure, an unsophisticated financial services sector and Iraq’s cumbersome bureaucracy.

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