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Iraq's M2 (Money Supply)Is Dropping Fast (scarcity= higher value)


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I follow Ahmed Tabaqchali on Twitter, he is the CIO of an Iraqi Investement Fund and he has been putting out some great info on Twitter recently.   https://twitter.com/AMTabaqchali

 

Also this excellent article--   http://www.iraq-businessnews.com/2018/04/05/market-review-market-consolidates/

 

CHECK OUT THE GRAPHS SHOWING THE M2

 

 

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

Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

The market consolidated its recent gains with both prices and turnover declining from those of the prior month. Average daily turnover declined by about 15% from that of the prior month with the second half of the month seeing even bigger declines in daily turnover (see chart below). The decline in turnover was paced by declines in the overall market with the RSISUSD Index down -2.6% for the month and up 16.9% YTD.

Daily Turnover Index on the ISX (green line) vs its moving average (red line)

AT-1.png

(Source: Iraq Stock Exchange (ISX), Asia Frontier Capital (AFC))

Foreign buying declined significantly from the strong pace of the prior month but remained consistent and at relatively high-levels in contrast to the on-off buying patterns of last year. Foreign selling dropped to the lowest level over the last 12 months (see chart below) which taken with the continued buying, implies that the Iraqi equity market is still in the early phases of foreign inflows.

Index of foreign buying (green) & selling (red) on the ISX

AT-2.png

(Source: Iraq Stock Exchange (ISX), Asia Frontier Capital (AFC))

The increasing signs of the improvement in liquidity, discussed in recent newsletters, continued through the improvement in the market rates of the IQD vs. the USD.  Given, the dollarization of the economy, it follows that the strength or weakness of the IQD is a function of demand-supply balance for IQD and not a specific USD weakness or strength.  During the month the market price of the IQD vs the USD improved by about +1%, lowering the premium over the official exchange rate to its lowest point in a number of years to 2.1% from just under 6% at the end of 2017 (see chart below)

Iraqi Dinar (IQD) exchange rate vs the USD Jan 2014 – Mar 2018

AT-3.png

(Source: Central Bank of Iraq, Iraqi currency exchange houses, Asia Frontier Capital)

(Note: The Spike in 2015 was due to a CBI policy that restricted the sale of USD, but was abandoned alter after causing a rise in parallel rates)

A great deal of this recovery is related to the recovery in oil prices and thus government finances that began in November 2016 as evidenced by the gradual decline of the premium over the official exchange rate from 10% in November 2016. The first visible beneficiaries were the country’s foreign reserves held with the Central Bank of Iraq (CBI), which increased to over USD 50bn by March vs USD 45.2bn at end of 2016, and the IMF’s estimates of USD 41.5bn by end of 2017. This was driven by less need for indirect monetary operations by the CBI to finance the budget deficit given improved government finances.

The improved finances were manifested through the flexibility gained by the changed dynamics of oil prices, which over the course of the last 12 months had a sustainable positive effect on these finances as Iraqi oil prices averaged about USD 49/bbl throughout 2017 vs. 2017 budget assumptions of USD 42/bbl, and YTD averaged about USD 61/bbl vs 2018 budget assumptions of USD 48/bbl. This was first expressed through a smaller budget deficit and thus less of a need for indirect monetary operations by the CBI and less borrowings, which should lead to greater flexibility for the government to allocate more resources to reconstruction and capital spending.

Given the centrality of government expenditures to the economy and the declining cost of the ISIS war, the improved finances should be reflected by a return of liquidity to the economy, but, this is yet to happen. Historically the observed time lag between Y-Y changes in oil revenues and Y-Y changes in M2 has been about 7-9 months which suggests that M2 growth should see improvement over the next few months as the chart below implies: it shifts the Y-Y percentage change in M2 back by 9 months versus the Y-Y percentage change in oil revenues. However, this is complicated by the uncertainties and government paralysis ahead of the parliamentary elections on May 12th which will likely delay this recovery.

Oil Revenues (green) vs the RSISUSD Index (red)

AT-4.png

(Source: ISX Central bank of Iraq, Iraq’s Ministry of Oil, AFC.)

(Note: M2 as of Dec. with AFC est.’s for Jan & Feb., Oil revenues as of Feb. with AFC est.’s for Mar.)

The increased liquidity in the form of both local and foreign inflows reported over the last few months needs to be maintained for the market’s consolidation to lead to further recovery, and for this recovery to be sustainable. The backdrop continues to be positive as the sustained improvements in government finances should ultimately lead to better market action: historically the equity market, as measured by the RSISUSD Index, has tended to follow the improvement in government oil revenues with a time lag of 3-6 months as the chart below shows.

Iraq’s Oil Revenues (green) vs the RSISUSD Index (red)

AT-5.png

(Source: Iraq’s Ministry of Oil, Rabee Securities, Iraq Stock Exchange, Asia Frontier Capital)
(Oil revenues are as of Feb with estimates by AFC for Mar)

Given the time lag involved and the election uncertainties, this will likely unfold over the next few months and the recovery will likely be in fits and starts with plenty of zig-zags along the way. This continues to underscore the opportunity to acquire attractive assets that have yet to discount a sustainable economic recovery.

Please click here to download 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’ experience in US and MENA markets.He is a non-resident Fellow at the Institute of Regional and International Studies (IRIS) at the American University of Iraq-Sulaimani (AUIS). He is a board member of the Credit Bank of Iraq.

His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or © 2018 Iraq Business News. All Rights Reserved.

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Website by The Web Orchard.
 
 
 
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Iraqsm2.jpg_large

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Thanks spacetuna, really good information.!

 

This economic indicators are showing that the CBI is moving in the right direction with the monetary policy. Keeping inflation and interest rate under control.

 

Go CBI

Go new Monetary policy 

Go RV

Go $1:1

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FEB 27 2017

Iraq: What You Haven’t Been Told

When most of us think of Iraq we picture burning oil fields, sand, blown-up buildings, sand, machine gun-toting jihadists, sand, helicopter gunships, sand, Humvees, mosques, and well… sand.

We know that George and Tony told us the war is over and that was ages ago so it must be true.

In fact, things must be jolly peachy by now because by my calendar that was May 2003, some 14 years ago. Still, George and Tony – like many podium donuts before them – said a lot of things and so with much of what traditional media tells us oscillating between questionable and “hahaha, bullsh*t”, it makes a whole lot of sense to source information directly from credible sources.

I’ve made a point of doing this personally and I can’t recommend it enough. In any event, long-term readers will recall my buddy Thomas Hugger from Asia Frontier Capital (I chatted to Thomas here).

Well, one of the funds under Thomas’ umbrella is a relatively newly launched Iraqi fund, and so, since I wanted to get a better idea of what’s happening in the Middle East and Iraq in particular, what better person to bring me up to speed than the CIO of the AFC Iraq Fund, Ahmed Tabaqchali.

I hit record on the conversation so that you, too, could enjoy it:

In addition as a follow up Ahmed followed up with a lot of data points (message below). This should be read in conjunction with the recorded call.

Dear Chris,

The correction in the equity market that was anticipated in last month’s update started in late January and extended into February with an overall decline of about -3%, as measured by the RSISUSD Index, which seems to have played its course and it looks like the market will end the month flat. The most likely scenario is for an extended consolidation with an upward bias in the next couple of months.

I, however seem to have been overly cautious in underestimating the strength of the rebound which is often the case in illiquid frontier markets in that observers always underestimate the strength of a rebound in the same way that extent of a decline exceeds observers’ expectations. 

This year’s market, so far, is playing out as the mirror image of last year that saw a relentless decline in the index with -13.7% in January, -4.4% in February, -10.75% in March, -6.6% in April, and -11.9% in May. Liquidity is the same driver with this year seeing an initial & gradual recovery in liquidity while last year it was the final draining of liquidity.

The revival in liquidity is mostly local with foreigners selling for the month, although at much smaller levels than last year (see chart below). While, this is an unwelcome development, never the less the flip side to it has been the ease at which locals have absorbed this selling especially considering that foreign selling in selected names has resulted in minor declines of -3% to -7% which has mostly been recovered as a result of local buying that seems to continue unabated.

Net Foreign activity index on the Iraq Stock Exchange (ISX) (green) vs. 10-day of average of net foreign activity (red):

1.png Source: Iraq Stock Exchange (ISX), AFC

The same observations hold for the recovery of the market price of the Iraqi Dinar with the price action mirroring that of the equity market. Recall that last month it was observed that the market price of Iraqi Dinar (IQD) vs the USD has improved by about +1.8% for January lowering the premium over the official exchange rate to about 8% from just under 10% that devolved in 2016. The premium widened to 8.7% by mid-February but has recovered to about 7.2%.  This is still above the normal range of 2-4% leaving room for further narrowing of the premium (see chart below).

Official IQD/USD rate (grey), Market IQD/USD rate (red), Spread (green) RHS

2.png Source: Central Bank of Iraq, AFC. The spikes in 2012, 2013 and 2015 were a result of CBI polices that aimed to control the demand for USD but were abandoned when they raised market prices.

However, the improvement in liquidity is still in the early phases, with overall liquidity still scarce as can been seen from average daily volumes that although are at the same elevated levels of the last few months but are meaningfully below those of the prior years when the market was much stronger. Given that the risks of the last two years are still present, liquidity in the economy is still scarce that the recovery will likely be in fits and starts and the opportunity continues to be to acquire attractive assets that have yet to discount a sustainable economic recovery.

Supporting liquidity improvements are the continued strength in oil prices at sustainably higher levels that those budgeted for by the government & the IMF and thus should give further impetus to the expansion in non-oil capital investment spending which is estimated to be up +192% yoy in 2017 after contractions of -68% in 2016 and -50% in 2015 (the importance of this investment spending for the economy was highlighted in December’s newsletter in the section for 2017 outlook which appears under the December 2016 review).

The last few days saw further acceleration in the Mosul offensive with the start of the campaign to liberate the western part of the city, which is coupled with increased US support and involvement as highlighted by the US defence secretary’s current visit to Iraq. Parallel developments against ISIS in Syria have been taking place which combined should accelerate the end of the ISIS occupation and end of conflict.

Finally, the chart below continues to support the thesis that the market has a significant catching up to do in the long process of discounting the end of conflict and the subsequent recovery afterwards. The recent gains, as impressive as they are, only represent a 30% retracement of the -68% decline from 2014 peak to 2016 multi-year lows.

Rabee Securities’ RSISUSD Index (red), 200 day moving average (green)

3.png Source: Iraq Stock Exchange (ISX), Rabee Securities, AFC

Regards,

Ahmed Tabaqchali, CIO AFC Iraq Fund

I find that every little extra data point and nuance is valuable to me, even if at the time I can’t see how it may have an impact on what I’m focussed on. Over time, it provides an incredible war chest of intellectual firepower in that 3 pounds of mushy stuff stored inside our skulls.

Since Iraq is a geographically strategic player in the Middle East, understanding what is happening there and with their neighbours could well be very valuable to us as investors and to those wishing to participate in the country. As is so often the case with postwar economies, the returns can be pretty phenomenal.

– Chris

I’ll leave you with some of the key quotes from the Chilcot report, because, after all, it’s worth knowing some things about the conflict, the aftermath of which Iraq is still grappling with:

“We’ve concluded that the UK chose to invade before the peaceful options for disarmament had been exhausted. Military action at that time was not a last resort.”

“It is now clear that policy on Iraq was made on the basis of flawed intelligence and assessments. They were not challenged, and they should have been.”

Tony Blair “overestimated his ability to influence US decisions on Iraq”

“The judgements about the severity of the threat posed by Iraq’s weapons of mass destruction – WMD – were presented with a certainty that was not justified.”

“Despite explicit warnings, the consequences of the invasion were underestimated. The planning and preparations for Iraq after Saddam Hussein were wholly inadequate.”

The legal basis on which military action was launched was “far from satisfactory”.

“The Armed Forces fought a successful military campaign, which took Basra and helped to achieve the departure of Saddam Hussein and the fall of Baghdad in less than a month.”

“The invasion and its aftermath led to the deaths of 150,000 Iraqi, most of them civilians.”

“The Government’s preparations failed to take account of the magnitude of the task of stabilising, administering and reconstructing Iraq, and of the responsibilities which were likely to fall to the UK.”

“Military action in Iraq might have been necessary at some point, but in March 2003 there was no imminent threat from Saddam Hussein.”

https://capitalistexploits.at/2017/02/iraq-ahmed-tabaqchali-afc-interview/

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1 hour ago, dinarham said:

  Would someone be ever so kind as to put this graph info  into terms that a  regular gal could understand ?  The graph lines  mirror each other to a large extent   Why is that ?

Less money (M2), less liquidity=scarcity/over

valued/overpriced.

 

Now...just tweaked this man's twitter post's a bit...copy and pasted this.

 

1)Iraq's’s improved public fiances were manifested thru the flexibility gained by the changed dynamics of oil prices, which over time had a sustainable effect as avg Iraqi oil prices for 2017 were $49/bbl & avg. YTD 2018 were $61/bbl vs budget assumptions of $48/bbl. 

 

2)This was first expressed through a smaller budget deficit & thus less need for indirect monetary operations by the CBI to finance the budget deficit & ultimately lead to less borrowings to finance this deficit.

 

3)The first beneficiaries were Iraq's foreign reserves held with the CBI, which increased to over $50bn by Mar vs $45.2bn at end of 2016, and IMF’s est’s of $41.5bn by end of 2017. This contributed to the recovery in the market rate of the IQD vs the USD

 

4)In time this should lead to greater flexibility for the government to allocate more resources to reconstruction & capital spending. Given the centrality of government expenditures to the economy, improved finances should be reflected by a return of liquidity to the economy.

 

Feel free to critique this. Thanks.

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6 hours ago, Laid Back said:

Thanks spacetuna, really good information.!

 

This economic indicators are showing that the CBI is moving in the right direction with the monetary policy. Keeping inflation and interest rate under control.

 

Go CBI

Go new Monetary policy 

Go RV

Go $1:1

Totally correct LB. CBI is doing what is needed to RV.   

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5 hours ago, Butifldrm said:

FEB 27 2017

Iraq: What You Haven’t Been Told

When most of us think of Iraq we picture burning oil fields, sand, blown-up buildings, sand, machine gun-toting jihadists, sand, helicopter gunships, sand, Humvees, mosques, and well… sand.

We know that George and Tony told us the war is over and that was ages ago so it must be true.

In fact, things must be jolly peachy by now because by my calendar that was May 2003, some 14 years ago. Still, George and Tony – like many podium donuts before them – said a lot of things and so with much of what traditional media tells us oscillating between questionable and “hahaha, bullsh*t”, it makes a whole lot of sense to source information directly from credible sources.

I’ve made a point of doing this personally and I can’t recommend it enough. In any event, long-term readers will recall my buddy Thomas Hugger from Asia Frontier Capital (I chatted to Thomas here).

Well, one of the funds under Thomas’ umbrella is a relatively newly launched Iraqi fund, and so, since I wanted to get a better idea of what’s happening in the Middle East and Iraq in particular, what better person to bring me up to speed than the CIO of the AFC Iraq Fund, Ahmed Tabaqchali.

I hit record on the conversation so that you, too, could enjoy it:

In addition as a follow up Ahmed followed up with a lot of data points (message below). This should be read in conjunction with the recorded call.

Dear Chris,

The correction in the equity market that was anticipated in last month’s update started in late January and extended into February with an overall decline of about -3%, as measured by the RSISUSD Index, which seems to have played its course and it looks like the market will end the month flat. The most likely scenario is for an extended consolidation with an upward bias in the next couple of months.

I, however seem to have been overly cautious in underestimating the strength of the rebound which is often the case in illiquid frontier markets in that observers always underestimate the strength of a rebound in the same way that extent of a decline exceeds observers’ expectations. 

This year’s market, so far, is playing out as the mirror image of last year that saw a relentless decline in the index with -13.7% in January, -4.4% in February, -10.75% in March, -6.6% in April, and -11.9% in May. Liquidity is the same driver with this year seeing an initial & gradual recovery in liquidity while last year it was the final draining of liquidity.

The revival in liquidity is mostly local with foreigners selling for the month, although at much smaller levels than last year (see chart below). While, this is an unwelcome development, never the less the flip side to it has been the ease at which locals have absorbed this selling especially considering that foreign selling in selected names has resulted in minor declines of -3% to -7% which has mostly been recovered as a result of local buying that seems to continue unabated.

Net Foreign activity index on the Iraq Stock Exchange (ISX) (green) vs. 10-day of average of net foreign activity (red):

1.png Source: Iraq Stock Exchange (ISX), AFC

The same observations hold for the recovery of the market price of the Iraqi Dinar with the price action mirroring that of the equity market. Recall that last month it was observed that the market price of Iraqi Dinar (IQD) vs the USD has improved by about +1.8% for January lowering the premium over the official exchange rate to about 8% from just under 10% that devolved in 2016. The premium widened to 8.7% by mid-February but has recovered to about 7.2%.  This is still above the normal range of 2-4% leaving room for further narrowing of the premium (see chart below).

Official IQD/USD rate (grey), Market IQD/USD rate (red), Spread (green) RHS

2.png Source: Central Bank of Iraq, AFC. The spikes in 2012, 2013 and 2015 were a result of CBI polices that aimed to control the demand for USD but were abandoned when they raised market prices.

However, the improvement in liquidity is still in the early phases, with overall liquidity still scarce as can been seen from average daily volumes that although are at the same elevated levels of the last few months but are meaningfully below those of the prior years when the market was much stronger. Given that the risks of the last two years are still present, liquidity in the economy is still scarce that the recovery will likely be in fits and starts and the opportunity continues to be to acquire attractive assets that have yet to discount a sustainable economic recovery.

Supporting liquidity improvements are the continued strength in oil prices at sustainably higher levels that those budgeted for by the government & the IMF and thus should give further impetus to the expansion in non-oil capital investment spending which is estimated to be up +192% yoy in 2017 after contractions of -68% in 2016 and -50% in 2015 (the importance of this investment spending for the economy was highlighted in December’s newsletter in the section for 2017 outlook which appears under the December 2016 review).

The last few days saw further acceleration in the Mosul offensive with the start of the campaign to liberate the western part of the city, which is coupled with increased US support system" rel="">support and involvement as highlighted by the US defence secretary’s current visit to Iraq. Parallel developments against ISIS in Syria have been taking place which combined should accelerate the end of the ISIS occupation and end of conflict.

Finally, the chart below continues to support system" rel="">support the thesis that the market has a significant catching up to do in the long process of discounting the end of conflict and the subsequent recovery afterwards. The recent gains, as impressive as they are, only represent a 30% retracement of the -68% decline from 2014 peak to 2016 multi-year lows.

Rabee Securities’ RSISUSD Index (red), 200 day moving average (green)

3.png Source: Iraq Stock Exchange (ISX), Rabee Securities, AFC

Regards,

Ahmed Tabaqchali, CIO AFC Iraq Fund

I find that every little extra data point and nuance is valuable to me, even if at the time I can’t see how it may have an impact on what I’m focussed on. Over time, it provides an incredible war chest of intellectual firepower in that 3 pounds of mushy stuff stored inside our skulls.

Since Iraq is a geographically strategic player in the Middle East, understanding what is happening there and with their neighbours could well be very valuable to us as investors and to those wishing to participate in the country. As is so often the case with postwar economies, the returns can be pretty phenomenal.

– Chris

I’ll leave you with some of the key quotes from the Chilcot report, because, after all, it’s worth knowing some things about the conflict, the aftermath of which Iraq is still grappling with:

“We’ve concluded that the UK chose to invade before the peaceful options for disarmament had been exhausted. Military action at that time was not a last resort.”

“It is now clear that policy on Iraq was made on the basis of flawed intelligence and assessments. They were not challenged, and they should have been.”

Tony Blair “overestimated his ability to influence US decisions on Iraq”

“The judgements about the severity of the threat posed by Iraq’s weapons of mass destruction – WMD – were presented with a certainty that was not justified.”

“Despite explicit warnings, the consequences of the invasion were underestimated. The planning and preparations for Iraq after Saddam Hussein were wholly inadequate.”

The legal basis on which military action was launched was “far from satisfactory”.

“The Armed Forces fought a successful military campaign, which took Basra and helped to achieve the departure of Saddam Hussein and the fall of Baghdad in less than a month.”

“The invasion and its aftermath led to the deaths of 150,000 Iraqi, most of them civilians.”

“The Government’s preparations failed to take account of the magnitude of the task of stabilising, administering and reconstructing Iraq, and of the responsibilities which were likely toW fall to the UK.”

“Military action in Iraq might have been necessary at some point, but in March 2003 there was no imminent threat from Saddam Hussein.”

https://capitalistexploits.at/2017/02/iraq-ahmed-tabaqchali-afc-interview/

Thanks Bitifldrm :tiphat:

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Thanks spacetuna/Butifldrm....The deal with the WMD...was the inventory 'Chemical Al' had at his disposal...The 'word' got back to run this issue down the ol' 'rabbit-hole'...once the leftwing MSM got inside intelligence on the weaponry used to gas the Kurds...Saddam Hussein had already threatened the Petro Dollar...when he started using surplus weapons...converted into chemical warfare...is where he finally got the attention he thought he could handle...History shows the UN gave Iraq over a year to surrender the WMD...that was enough time for the "three letter boys" to do what was needed....

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Awesome thread going here, much obliged spacetuna. I believe we are pretty much down to the wire here, Iraq has been making huge progress as of late, and, the new monetary policies well in place. Personally I thought we would see the HCL in place, prior to the elections, in order for Abadi to secure his second term. But, I don’t think he will have any issues anyway, his win is pretty much guaranteed  :twothumbs:

Have a great evening all :tiphat:

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