MIDEAST MONEY-Foreign investment in Iraq finally building momentum
Wed Apr 18, 2012 10:00am EDT
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* Problems with security, politics, laws unresolved

* But rise in oil output to boost growth, state finances

* Foreign commercial activity in country increasing

* Investment spreads beyond oil sector and geographically

By Andrew Torchia

DUBAI, April 18 (Reuters) - When Dubai-based property developer Range Hospitality decided to build a $175 million hotel and residential complex in Iraq's holy city of Karbala, it ran into a common difficulty for investors in the country: raising finance.

It solved the problem by pre-selling some of the rooms on a time-sharing basis to pilgrims, tour operators and other investors, the company says. Construction is underway and the complex is due to be completed by the end of 2013.

"Having been in Iraq since 2009, we have seen the landscape change dramatically," said Munaf Ali, Range Hospitality's chief executive. The political outlook has become more stable, he said, while "security and infrastructure can be seen to improve on a daily basis."

Nine years after the United States invaded Iraq to topple Saddam Hussein, there are signs that foreign investment in the country is finally building momentum.

Big obstacles remain. Although violence has declined since the height of sectarian fighting in 2006 and 2007, bombings and shootings, many by al Qaeda's Iraq wing and allied Sunni Muslim insurgent groups, still occur almost daily.

Distracted by internal disputes, Prime Minister Nouri al-Maliki's government has largely failed to push through legal reforms that would clarify property rights and strengthen contract enforcement, businessmen complain. The central government is locked in feuds with the autonomous Kurdish region over oil, land and power.

But projects such as the Karbala hotel suggest Iraq may be reaching a critical point where foreign investors feel the country's rapid economic growth and potential are outweighing the risks - across the economy, not just in the oil sector.

"There's a tremendous imbalance between the potential wealth of Iraq and its current situation in terms of both consumer goods and infrastructure," said Farouk Soussa, Middle East chief economist at U.S. bank Citi.

"When it happens, the catch-up will be immense. A lot of people are positioning themselves for this."


The potential of Iraq's oil wealth means some foreign investors are willing to accept a lot more risk than they would in less well-endowed countries.

Iraq said last month that its oil output had risen above 3 million barrels per day (bpd) for the first time in more than three decades. It aims to double output over the next three years and has a long-term goal of 12 million bpd; the target may well be over-optimistic, but Iraq is still expected to be the world's biggest source of new oil supplies in the next few years.

This looks set to produce economic growth rates during the rest of this decade that would be inconceivable for most states, even if Iraq does not fix its political and legal flaws.

Gross domestic product growth averaged 3.6 percent in the six years through 2010. It hit 9.6 percent last year, the International Monetary Fund estimates, predicting average growth will top 10 percent in the five years through 2016.

That is likely to improve Iraq's state finances dramatically, allowing it to offer bigger economic reconstruction contracts to local and foreign investors. The IMF expects annual oil exports to almost double to $139 billion by 2016, converting last year's estimated budget deficit of 8.7 percent of GDP to a surplus of 18 percent four years from now.

"Iraq could become one of the world's wealthy sovereigns," Citi said in a report which it presented to potential Chinese investors in the region. It predicted Iraq's net government assets, now almost $50 billion in the red, would be nearly $100 billion in the black by 2020.

Such projections depend on Iraq's political stability. Sherif Salem, portfolio manager at Abu Dhabi's Invest AD, which runs one of the few foreign equities funds in Iraq's stock market, says he is looking beyond "short-term political volatility" at a time horizon four to six years from now.

The fund's performance since its launch in October 2010 mirrors the highs and lows of Iraq's political development. By last July the fund had made a 26 percent gain since launch during a bull market triggered by Maliki's success in forming a coalition government.

But the fund closed last year with only a 15 percent gain as security worries increased with the withdrawal of U.S. troops. Its gains since launch have now dwindled to about 6 percent, as Iraqi authorities seek the arrest of Vice President Tareq al-Hashemi, a senior Sunni politician in a government led by Shi'ite Muslims, over charges that he ran death squads. The warrant for Hashemi has fuelled political tensions that threaten to upset the country's fragile sectarian balance.

"There's a lot of intention - when we meet with investors, they're very excited about the potential," Salem said of raising money for his $20 million fund. "But the final step of putting the money in can take a bit of time, because they need to get totally comfortable with the idea of investing in Iraq."