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Market Review: “IMF Revises Growth Estimates Higher”

Market Review: “IMF Revises Growth Estimates Higher”

By Ahmed Tabaqchali, CIO of Asia Frontier Capital (AFC) Iraq Fund.

Any opinions expressed are those of the writer, and don’t essentially mirror the views of Iraq Enterprise News.

The market’s motion in July was so quiet that it turned actions like watching paint dry into spectator sports activities, as the beginning of the height summer time and holiday season depressed buying and selling volumes.

Nonetheless, the typical day by day turnover’s decline of −15% month-on-month did not erase the turnover positive aspects made within the prior two months, small as they have been.

For the month, the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), was down −four.40% and down −Three.97% for the yr.

The highlight of the month, though, was the release of the newest IMF nation report for Iraq, through which the IMF up to date its estimates, last made in the summer of 2017, for both the longer term financial outlook and for the previous few years. The modifications to its GDP progress estimates for the disaster years 2014-2017 have been as follows:

Yr 2014 2015 2016 2017
Previous estimates +Zero.7% +four.Eight% +11.0% -Zero.4%
New estimates +Zero.7% +2.5% +15.2% -2.5%

While estimates for the years following the battle modified as follows:

Yr 2018 2019 2020 2021
Previous estimates +2.9% +1.7% +2.Zero% +2.1%
New estimates -0.6% +four.6% +5.Three% +2.6%

The primary takeaway is that the crisis years have been, on the whole, weaker than initially anticipated. While, 2018, the first yr following the battle, was the second yr of a deep recession with a contraction of -0.6% on the again of the prior yr’s -2.5% decline, as an alternative of being a primary yr of an financial restoration, at +2.9%, following a shallower decline of -Zero.four%  -a message telegraphed by corporations listed on the Iraq Inventory Change (ISX) during the last two years. Then again, the anticipated restoration in 2019/2020 can be a lot stronger than estimated earlier with GDP growing at +4.6%/+5.3% as an alternative of +1.7%/+2.0%.

Larger oil exports and the improved oil pricing surroundings, during the last two years, resulted in a lot larger government revenues, than estimated earlier, from 2017 onwards. This, with an extended lag, is initially translating into elevated shopper spending in 2019, provided that the federal government employs over 50% of the working population. This, would then, be adopted by the government’s funding spending powering the non-oil financial system. Subsequently, the IMF’s new assumptions on non-oil GDP progress rates are crucial for the financial system and the inventory market. The IMF’s estimates for the extreme contraction in non-oil GDP in the course of the crisis years modified as follows:

Yr 2014 2015 2016 2017
Previous estimates -Three.9% -9.6% -8.1% +1.5%
New estimates -3.9% -14.four% +1.Three% -Zero.6%

Accordingly, the downward trajectory in 2015 was a lot steeper at −14.4% than earlier estimates of −9.6%, whereas the steadiness anticipated for 2017 was, as an alternative, a double dip recession following the bounce in 2016. Also, the contraction lasted longer at four years than earlier expectations of three years. While estimates for the years following the conflict modified as follows:

Yr 2018 2019 2020 2021
Previous estimates +2.0% +3.Zero% +Three.9% +4.0%
New estimates +Zero.8% +5.four% +5.Zero% +4.1%

Confirming the sooner message that 2018 was the second yr in a contraction with the non-oil GDP dragging the overall GDP down, negating the robust contributions of higher oil prices and exports to the overall GDP progress. Subsequently, the anticipated recovery for 2019/2020 can be much stronger at +5.4%/+5.Zero% versus earlier estimates of +Three.0%/+3.9%. The modifications, for outlook for non-oil GDP progress, are according to the analysis, made right here over the previous few months, on the drag on the financial system in 2018 and early 2019 because of the political paralysis earlier than, during, and after the Might 2018 parliamentary elections. A paralysis that may have led to March because the 2019 finances was only handed into regulation in late February 2019.

Moreover, the IMF estimates that non-oil investment spending for 2019 can be about USD 11.25bln, or an +Eight.5% stimulus to the new non-oil GDP estimate for 2019. It’s unlikely, that the government would have the ability to spend all the budgeted quantity in 2019, given the sluggish nature of investment spending, and the federal government’s historic under-execution of such spending. Which in all probability explains the IMF’s estimates for funding spending at about 13.5% less than that projected by the 2019 authorities finances.

(Source: IMF, country studies no. 17/251 and 19/248, Asia Frontier Capital)

On the heels of the brand new IMF report, the Ministry of Finance (MoF) knowledge as of Might, present a month-on-month progress in funding spending of +20%, but from a really small base, because the January-Might investment spending is simply about 8% of the non-oil funding spending price range of USD 11.25bln. Implying that a lot of the estimated +5.4% progress in non-oil GDP for 2019 can be backend loaded, and thus a a lot stronger progress is anticipated in the second half of 2019 than the primary half. It is going to possible accelerate further in 2020, as the unfinished spending for 2019 spills over into 2020. The government has considerable firepower at its disposal to proceed investment spending, even because it continues to under-execute, as the same MoF knowledge for Might exhibits an extra progress in price range surplus for 2019 at USD Three.3bln, for a cumulative 29-month surplus of USD 26.5bln.

As postulated here up to now, this funding spending which began with a trickle in 2019, should grow as the complete spending will get underway, carrying over into 2020, and finally would lead to a sustained economic recovery in keeping with the new IMF’s future outlook, or in all probability considerably larger given the multiplier effects of such spending.

The news from the company world helps the financial image painted by the IMF as evidenced from a variety of company earnings studies for the second quarter. Pepsi bottler, Baghdad Gentle Drinks (IBSD), continued its robust progress with revenues for the six months in 2019 up +Three% over the same period in 2018, with its pre-tax income for the same interval up +9%. Telecom operators AsiaCell Communications (TASC) and Zain Iraq (TZNI) reported increased clients by 6% and four% respectively for the six months in 2019 versus the same interval in 2018. Nevertheless, both revenues and earnings continued, for a similar period, to point out an business within the early levels of recovery with TASC having flat revenues however earnings earlier than curiosity depreciation and amortization (EBITDA) down −9%, while TZNI reported revenues declining −6% and EBITDA up +13%. Each corporations cited increased competitors and advertising prices.

Financial institution of Baghdad’s (BBOB) second quarter (Q2) numbers, marked a bank following by means of with the restoration that started in 2018, which, whereas confirming the preliminary signs of a gradual restoration in the sector, additionally disenchanted native speculators who have been hoping for a repeat performance of the primary quarter (Q1). Deposits continued to develop at +4.3% for the first half of 2019 versus the same period in 2018, whereas credit progress continued to be unfavorable at −1.four%- which is a slower price compared with the past- and led to a drop of −27.1% in internet curiosity revenue. FX revenue recovered +57.Zero%, which is a simple comparability given the severe drop seen in the same interval in 2018, however however pointing to a stabilization on this revenue supply. Commission revenue, continuing to rise in importance, was up +21.3%. Internet revenue, while up +983% in the interval or at over 10x the determine for a similar period in 2018, while very wholesome, was principally achieved in Q1. Therfore, while Q2’s internet revenue confirmed continued progress, it however poured chilly water over speculative hopes for the bank to resume dividend funds for 2018’s earnings. It was these hopes that led to a +62.5% rally within the inventory in Might, which quickly moderated to a decline of −12.Eight% in June, and declined an extra −17.6% in July because the financial institution confirmed in its AGM that it will not pay dividends for the yr. The stock’s closing worth in July, continues to be up +16.6% from the April shut before it started its wild three-month journey. While, BBOB pulled the opposite main banks up with it in Might, it didn’t drag them lower in June and July which could be very totally different from the market’s responses to such disappointments in 2018. That time all banks have been painted by the same brush, which exhibits a market that has begun to discriminate displaying it has doubtless bottomed or is making a bottom.

Buying and selling exercise in August will probably continue to be in-line with that of July’s exercise, as it’s part of the peak of the summer time season and will embrace the second Eid vacation break of the yr. Whereas, there isn’t a new supply of liquidity out there, and native speculators proceed to dominate activity, overseas buyers have been consistent internet consumers over the previous few of months in a marked distinction from the picture for a lot of the prior months because the chart under exhibits.

Index of internet overseas exercise on the Iraq Stock Change (ISX)

(Supply: Iraq Inventory Change (ISX), Asia Frontier Capital)

The extension of the June pull-back in July, continues to suggests the start of a consolidation part, which would wish a big restoration in turnover earlier than a restoration can grow to be sustainable and for the market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), to claw again a few of the −70.5% decline from the height in early 2014 to July’s 2019 closing levels.

Please click on here to obtain Ahmed Tabaqchali’s full report in pdf format.

Mr Tabaqchali (@AMTabaqchali) is the CIO of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years’ expertise in US and MENA markets. He’s a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American College of Iraq-Sulaimani (AUIS), and an Adjunct Assistant Professor at AUIS. He is a board member of the Credit score Bank of Iraq.

His feedback, opinions and analyses are personal views and are meant to be for informational purposes and common interest only and shouldn’t be construed as particular person funding recommendation or a suggestion or solicitation to purchase, promote or maintain any fund or safety or to adopt any funding strategy. It doesn’t represent legal or tax or investment recommendation. The knowledge offered in this materials is compiled from sources which are believed to be reliable, however no guarantee is product of its correctness, is rendered as at publication date and should change with out notice and it isn’t meant as an entire evaluation of each materials reality relating to Iraq, the area, market or investment.