Since 1 October, Iraq has been de-stabilised by protests (involving fatalities, injuries, internet shutdowns and curfews) against a lack of economic opportunity, public services and elite corruption. The immediate cause of the protests are local: 40% of Iraqis are below the age of 15, the median age is merely 20, and ease of doing business and corruption perception are in the bottom 10% of global rankings and have deteriorated over the past three years. But the potential repercussions are international:
1) There is severe stress on the Iraq government, which was formed by a compromise prime minister, Adel Abdul Mahdi. He leads a shaky coalition, which took five months to put together after the inconclusive May 2018 election. Mahdi himself does not lead any party and, in his coalition, no individual party bloc has more than 16% of parliament (and that bloc, Moqtada al-Sadr's Sairun, has announced it is suspending its participation in parliament until the government responds with a plan to address protester grievances);
2) Exposure of interests or unleashing of proxies belonging to external actors (the US, Iran, Saudi as well as Israel and Turkey) if the protests allow for any shift in the balance of power in Iraq, with subsequent consequences for the rivalry between those powers in other regional arena (eg Lebanon, Syria, Yemen), not to mention Iran-US relations - over 5,000 US troops are still based in Iraq. The government, however fragmented, is closer to Iran than the US (institutionally reinforced by efforts this year to incorporate the Iran-aligned Popular Mobilisation Forces into Iraq's formal army);
3) Risk to oil output in the protesting region of the south, more from labour strikes, rather than sabotage, at this stage (ie upside risk to oil price) - non-Kurdistan Region Iraq holds 70% of the country's oil reserves, Iraq accounts for 10% of global proven oil reserves, Iraq is the third largest producer in OPEC Plus, Iraq exported c4mbpd in September 2019, in line with its YTD average and higher than its five-year average of 3.8mbpd).
Source: Reliefweb, IHEC, OPEC, Bloomberg, WB, TRI, Tellimer Research
Government US$ bond spreads widen, equities already languishing
Mid yield to maturity on the Iraq 6.752% 2023 US$ bond (rated Caa1u/ B-/ B- by Moody's/ S&P/ Fitch) jumped from 5.932% at the close of 30 September to 6.507% at the close of 4 October. Z-spread widened from 439bps (101bps over EMBI) to 513bps (164bps over EMBI) over the same period.
Iraq equities, measured by the local ISXGI, has for much of this year been languishing at near its four-year lows. Below, we screen international stocks with Iraq exposure for revenue exposure, liquidity and valuation.
Source: Bloomberg, Tellimer Research
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