During periods of conflict, crisis and upheaval, the investment environment is seemingly bleak. This is aggravated by the absence of security, an unstable macroeconomic environment, failure to comply with the rule of law, weak infrastructure and a dysfunctional labour market and educational system. By contrast, in post-conflict periods, investment activity picks up as an investment-enabling environment takes hold. Security is restored, the macro economy stabilises, the rule of law is upheld, and banks evolve, allocating capital to the economy and providing the private sector with much-needed access to credit.
Iraq is a country that holds much economic potential, underpinned by untapped oil resources and strong demand for infrastructure, goods and services, due to 30-plus years of underinvestment as a result of wars, sanctions and neglect. Since the downfall of the Baath regime in 2003, Iraq has tripled its oil production from approximately one million barrels per day to three million, making it one of the leading producers of oil in the world (see Fig. 1). In this time it has also posted strong GDP growth rates (see Fig. 2) and saw the market capitalisation of its stock market reach $10bn by the end of 2013, up from only $3bn in 2010. With oil production expected to triple yet again, reaching a reported nine million barrels per day by 2020, the scale of economic growth is expected to mirror the economic transformation of Saudi Arabia in the 1960s and 1970s and Russia in the 1990s. For investors, success in a country like Iraq could reap significant returns.
Iraq’s expected growth rate, 2014
5.9%
Making the transition
Yet, Iraq today has not completed its transition from a conflict economy to a post-conflict environment. In considering the country as an investment destination, recent political developments and instability are troubling. As a result, investors, especially foreign investors, are adopting a ‘wait and see’ approach, remaining on the sidelines due to what they perceive to be a country in conflict.
The Capital Bank Group, consisting of the Capital Bank of Jordan and its majority-owned subsidiary, the National Bank of Iraq (NBI), is no stranger to this environment. Only two years after the fall of the Baath regime in 2003, when Iraq was embroiled in widespread turmoil and sectarian strife, Capital Bank became one of the first foreign banks to enter the Iraqi market when it acquired a controlling stake in NBI. Since then, the group has gradually, but consistently, built momentum in the Iraqi market. Capital has increased from approximately $20m in 2004 to approximately $215m today, and successfully building a profitable business with NBI posting net income of $12.6m in 2013.
Overcoming conflict
With an approximate 10-year presence in Iraq, the Capital Bank Group has grown accustomed to operating in an environment that may not necessarily adhere to familiar norms. When foreign investors look at Iraq today, they see a conflict zone. However, as a bank operating in the country, we see a different picture. Despite recent developments, Baghdad today is a large business hub. The capital, which is Iraq’s largest city by population, has constantly seen new industries being developed and investors coming in. Business continues to thrive there, with a very robust trade finance activity.
Iraq’s northern Kurdistan region has long enjoyed political tranquillity, offering lucrative business opportunities. Southern Iraq, containing 65 percent of the country’s oil wealth, is also emerging as a relatively stable region insulated from the political and security challenges seen in the central and western regions.
Moreover, throughout the turmoil, the economy still boasts foreign reserves in excess of $80bn. Meanwhile, the Iraqi dinar has been relatively stable against the US dollar since 2009. In general, we have not seen a drop in commercial activity. The Iraqi economy is expected to post a 5.9 percent growth rate in 2014, according to the latest IMF projections. These indicators are very important for the banking and investment sectors providing them with a different perspective. The Capital Bank Group is committed to the Iraqi market and has expanded its range of services appropriate for the realities of the business environment in each region.
We remain active in the area of trade financing in all parts of Iraq, as this is a much-needed service for our clients with large trade volumes. On a monthly basis, the average volume of letters of credit and letters of guarantee issued by us has increased 47 percent and 28 percent respectively, from 2013 to 2014. Other services we provide include cross-border cash management and transfers. We are also extending credit facilities to our corporate clients, and car loans in the north. Through our investment banking subsidiary, Capital Investments, we are providing corporate finance services to investors in projects in the north and the south, arranging debt and equity financing and advising foreign investors seeking to gain exposure to lucrative investments.
Stability and success
Despite the recent developments, we see great potential for the future in Iraq. Therefore, we continue to focus on the market and on putting in place strategies and making investments that will position us for further success when the situation stabilises. We are currently present in all major cities in Iraq and are planning to double our branch network over the next two years. We are introducing ATMs in the fourth quarter of this year and offering credit cards to our clients in Iraq. We are also investing in our brokerage business, Wahat Al Nakhil, upgrading IT systems and applying for a custodian license to allow us to better service foreign investors seeking to invest in the Iraq Stock Exchange. What’s more, we are developing investment products for our existing and new clients who are seeking to capitalise on promising investment opportunities in Basra. At Capital Bank Group we are in the business of turning challenges into opportunities and we strive to better serve our clients and the entire region. Throughout the crisis, we are remaining closely engaged with our clients.
The Capital Bank Group is present in Iraq and Jordan. Given the geographic proximity between the two countries, close historic ties, and the fact that more than half a million Iraqis call Jordan their home, it is a natural hub for investing in and doing business with Iraq. The Capital Bank Group is in a unique position and we have a distinctive vantage point that allows us to effectively capitalise on opportunities that are present in each of the regions, and to assist our clients in accessing these opportunities.
Iraq today is a country in a process of state building and serious reconstruction, a process that is unfolding, with different dynamics, in various parts of the country. Over the course of the next three to five years, we believe the situation in Iraq will stabilise, an enabling environment for investment will develop, and immense potential will be unlocked. We see the development of a more positive future. The change will be gradual but consistent, and we believe investors who enter early will be rewarded.
