SWFloridaGuy - This is in response to a well thought out post by Tlar of Dinar Alert.
SWFloridaGuy - This is in response to a well thought out post by Tlar of Dinar Alert. Iraq is not out of Chapter 7, Iraq still has not passed the HCL, permanent ministers are not seated and China is not in control of Iraq's currency.
The CBI, Finance Committee, United Nations and CoM have all said that reform (power sharing, HCL, ministers, Strategic Council, Article 140 etc), that supports stability is necessary to move forward both economically and politically.
Maliki could certainly throw a wrench in the process as he's done many times in the past but of course we hope that's not going to be the case for once.
Currently the Minister of State for National Security, Minister of State for National Dialogue, Works & Planning Minister, Women's Affairs Minister, Trade Minister, Municipalities and Public Works Minister, Electricity Minister, Defense Minister and Interior Minister are all still interim and need to be appointed but the Defense Ministers are the most crucial at this time.
We have seen a lot of progress though in these areas as far as the dialogue goes, which gives us hope announcements may be made and laws/ammendements may be passed (read into the gazette), fairly soon.
Unfortunately, some "intel" providers are either reading bogus prosperity package memos, misinformed, posting for adulation, trying to pump dinar sales or all four. We should all work together to provide fellow investors with a fair representation of what our interpretation of our research teaches us.
No, I'm not saying to just believe Iraq articles. I've actually never once said that. If someone is going to be honest, they will tell you they don't have a clue how this will turn out and that's exactly how it should be. Only the very naive or arrogant believe that they have the inside track on this.
There is no real precedence for the unique investment opportunity Iraq presents, which we have all recognized and is the reason we are here. Previously there have been 14 episodes where a country's real and nominal effective exchange rate appreciated by 10% or more without discretionary adjustments of the parity by the government (over a two-year window or less), leading to sustained real effective appreciation.
Since 1960 there have been 25 episodes of large nominal and real appreciations. If you solely look at historic large currency appreciations, even a 20% increase, runs the risk of having negative long term effects. A 100,000% increase is not even something regarded as possible by most economists. The macroeconomic effects of "appreciation shocks" differ between developed and developing countries. Iraq is a developing country despite the fact that they have functioning (somewhat) branches.
Just to reiterate my stance, I absolutely am of the belief that we're going to see a large profit from this and Iraq has many options when it comes to how they can achieve a higher exchange rate with a value somewhere on par with the USD or (eventually) somewhere next to the value of their neighbor Kuwait. "Eventually" being the key word in that statement.
The differential effects in similar recovering economies appears particularly pronounced with regard to the external balance that deteriorates more persistently in developing countries. Export growth takes a stronger hit in developing countries, but is counterbalanced by stronger domestic growth.
Usually these revaluations were the indirect consequence of the appreciation of the anchor currency of the peg against other currencies. In Iraq's case, their currency is severely undervalued due to UN resolution 661, a devastated infrastructure and have had to completely rebuild their banking sector.
But Iraq has also been on the path to recovery for quite some time. Iraq presents a unique situation and there is a tremendous gap between the current rate and previous values the IQD has held. It has taken a very long time for Iraq to recover and it's my belief that after the GOI implements these latest reforms and will have reached it's pinnacle and be strong enough support phase 3 of the economic reforms.
Studies have shown that the immediate output response of large RVs is positive, i.e. output growth accelerates, but they turn negative after about three years. For years now economists have been studying ways to raise the value of the IQD and sustain that growth as well.
I am very encouraged by some recent reports out of Iraq regarding the easing of political tensions, the focus on implementing the reform proposal. Does this mean we will RV tomorrow at a rate of $42? Of course not, it doesn't relate directly to the exchange rate at all. Indirectly however, we do see a connection.
The CBI did say that they will proceed with the National Economic Plan (whatever that may be), once the GOI resolves this political crisis and if the reports out of Iraq are true, they have made much progress in this area. Just to clarify, the CBI did not say revalue, they said remove the zeros.
There seems to be much confusion on what "remove the zeros" actually means. Some researchers like to add their own interpretation and say it refers to a revaluation and the entire process of drawing in the large notes. Deleting the zeros simply means deleting the zeros, pretty straight forward.
This simply refers to the CBI's plan to drop the zeros from the nominal value and introduce the lower denoms to ease cash transactions. I'm simply making this point because I see the CBI misquoted quite frequently and used to struggle with this understanding myself. Having said that, I do believe Iraq will revalue their currency and I think there are many ways they can achieve this.
For painfully obvious reasons, the CBI will never announce to the world they are about to revalue their currency. Shabibi himself alluded to this in Washington when he said "Even if I knew I could never tell you."
Whether there are several incremental adjustments or a historical large currency appreciation of 100,000% to get us to 1 to 1, I do think Iraq will accomplish returning their currency to it's previous levels by increasing the value of the paper currency in a quantitative sense in relation to the current value of 1 USD.
There are several ways I believe Iraq could accomplish this. I mentioned these options many times in the past but will reiterate again for the newbies. Some are better solutions than others. Under a fixed exchange rate, fluctuations in the value of a currency to which the IQD is pegged could produce volatility. We see these effects when the USD appreciates and other currencies linked to the USD in turn show appreciation also.
Iraq does not want unnecessary monetary volatility. There are a few solutions to this. They could include oil in a basket of currencies to which the dinar is to be pegged in order to facilitate the recovery and expansion of the oil sector. Define the value of the dinar as 1/3 a USD + 1/3 a Euro (subject to change dependent upon the future of the Euro), + 1/100 of a barrel of oil.
An oil-producer like Iraq could thrive with this scenario even if there were big swings in international exchange rates or global oil prices in the future. For this to work though, they would need to stabilize the price of oil in terms of purchasing power.
Another solution is Iraq could peg the currency to the export commodity (PEP) as I've mentioned in the past. The CBI could set the daily price of IQD in direct proportion to the daily price of a barrel of oil in terms of USD. That would stabilize the price of oil in domestic terms. That's the best of both worlds (fixed & floating) and would also help promote integration into world markets.
I cannot prove that Iraq will revalue their currency but I do postulate that theory and believe there is a great basis for it. The powerful countries, organizations, corporations and foreign Central Banks that have all invested so heavily into Iraq's reconstruction and helped to foster monetary cooperation will also reap the benefits.
This is why I believe they have assisted in the development, extended project loans and offered technical assistance with communications and Iraq's banking sector. The global monetary system is broken and although the IQD is not the world's savior by any means, I do believe Iraq presents a unique opportunity and may serve the role of a fulcrum in its recovery.
Thanks for your support and I hope this answers a few questions. As always, this is nothing more then my opinion and I certainly could be wrong about it all. Merry Christmas everyone!!