Iraq’s Post-Election Economy: Boom or Bust?
Prospects for Growth as the Political Dust Settles
On March 7th, Iraqis went to the polls to elect a new Parliament in landmark elections that, by and large, proceeded peacefully. Violence has decreased precipitously over the past two years due to Iraqi and coalition forces’ efforts to root out insurgents. The relative calm has intensified Iraqis’ demands that their elected representatives produce tangible improvements to their standard of living. But the failure of any coalition to secure a solid majority may result in further delays to Iraq’s economic development as political parties spend weeks jockeying for position. Furthermore, it is unclear that the new government or the bureaucrats it appoints will have the capacity to manage major reconstruction initiatives.
How are elections likely to affect the process of reconstruction in Iraq? Will any particular sectors or geographies enjoy relatively greater growth? Will any face additional obstacles? What signs can we look for to indicate that reconstruction and economic development are on track?
We asked our experts.
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Expert 1: Executive at leading Iraqi brokerage firm
Iraqis cautious, fed up with inaction, ready to move
“A lot of the people are saying that at the end of the day, everyone was fed up with Maliki and his cabinet because for the last four years they were all working on their own behalf. You know a lot of his cabinet ran this time as independents, and they lost out. The new parliament will be much more effective.
The stock market hasn’t moved very much yet [in response to elections]; it has been quiet. The Kurds are holding the ace – are they going with Allawi or Maliki? So for the last month or so nobody wants to buy anything. There’s no movement in the market – nobody is even buying any cars or anything. But we take this as a positive sign, the caution. Things are delayed, but they are proceeding according to a plan, which is good.” -
Expert 2: Former senior advisor to the Prime Minister of Iraq
Development is “full steam ahead”; Basra’s star rising, while the North is stalled
“I think a delay in reconstruction – if there is one – will be very brief. I don’t foresee a long delay in getting a government together. Some have suggested that it will take months to put together, but I don’t subscribe to that. I think anywhere from 30 days to six weeks should be sufficient for them to get going.
I think the South will see a definite spurt of growth because of the recent signing of the contracts with oil majors, and because of the increased stability. On the other hand, I think a number of question marks hang over the North, like the status of Kirkuk and also the status of the oil contracts signed by the KRG. In Kirkuk, the vote went ahead and it was split nearly 50/50, although it looks as though Allawi has come in slightly ahead of the Kurdish list. But this is a blow for the Kurds because they expected to be in the majority there.
In terms of sectors, I don’t think that there is one that will necessarily perform better or worse; everything is full speed ahead. Everything is affected positively. The formation of the government is the only thing holding back accelerated development, and as I said I think this will happen sooner rather than later.” -
Expert 3: Partner in an investment firm active in Iraq
Peaceful and legitimate transfer of power is the go-ahead sign, expect capital to come off sidelines
“The elections mark an important, positive step in Iraq's reconstruction process. Turnout was good, violence was relatively low, and irregularities were minor and local. We know, so far, that pro-U.S. parties have heavily outperformed pro-Iranian parties, and that cross-sectarian coalitions are the big winners and sectarian parties the main losers. But the big winner has been the electoral system and process, and this, more than which parties ultimately coalesce to form the next ruling coalition, is what the global capital market has been waiting to see. Look for continued strong economic growth, potential minor adjustments to the highly beneficial contracts signed last year with IOCs, and a surge in foreign investment in the real estate, oil and gas, media and communications, and financial services sectors.”
Insights from the Ergo Network
Ergo’s View
Ergo believes government efficiency, or lack thereof, will be the measure of Iraq’s immediate future. Will pressure on the new government to speed up economic development overcome the entropy, corruption, and mismanagement one expects in a nation emerging from nearly 30 years of war? The signs are encouraging:
1. The pressure for progress is real. The Iraqi electorate has embraced democracy and increasingly demands accountability of its political leaders. This is evident in the popular support for “open lists” in this election as opposed to the “closed lists” used in the previous election. The government has in the past proven responsive to demands for accountability, for example by prosecuting several high-profile cases of corruption among its ministries. Individual representatives in this election are relatively more exposed to the popular will and will need to be more responsive to the popular demand for progress if they are to keep their jobs.
2. The recent contracts that Iraq has signed with international oil majors are a strong incentive for the Iraqi government to support improvements to its infrastructure and business environment. These contracts have the potential to increase Iraq’s oil output to 12 million barrels per day, making it the leading producer in the world. But to get there the contracts will require a massive amount of capital and labor investments. The government faces a looming budget crisis and derives almost all its revenue from oil income. Bottlenecks in Iraq’s shipping, transport, and transit infrastructure – including oil pipelines, but also channels for equipment and personnel delivery to worksites – or in its finance and banking infrastructure will directly impact the country’s fiscal health. The government must support economic development to preserve its main source of income.
Look for continued demand growth in basic sectors including building materials and refined fuel products, as well as large infrastructure projects in power and water that play well politically. Violence is increasingly sporadic, but protracted political stalemate may incite an increased number of attacks, which could slow – but will likely not stop – development.
Which infrastructure projects in Iraq are the highest priority for the government? What consumer products are most in demand among an increasingly stable Iraqi consumer base? Who are the most capable local partners?
Ergo can answer these and other questions by leveraging our extensive network of experts and in-country teams in Iraq. Their knowledge and access undergird our in-depth market studies on political risk and sectoral development, and our rapid due diligence on potential local business partners. For more information about our Iraq capabilities, please visit Access Iraq.