A Cautionary Tale for Iraq

Dunia Frontier Investments just released an excellent, detailed study on investment trends in Iraq from 2003-2009 (YTD). According to a synopsis of the report posted on the Business Middle East website, Iraq has gone through roughly three phases of investment trends since 2003: the period immediately after the US invasion was largely characterized by large lump sum EPC and service agreements in oil and gas and infrastructure awarded by the US government, mostly to US companies. Phase two, which Dunia defines as lasting from 2005-2007, saw a sharp drop off in investment as violence in the country increased. Phase three began largely after the relative drop off in violence following the surge. According to Dunia estimates, investment during this third period (and investment here must be defined as project announcements versus actual FDI flow), increased by 1500%.

As always, the devil is in the details here. FDI in Iraq, as I long suspected it might, is beginning to resemble investment flows in the rest of the Middle East. That is, many countries, from Libya to Tunisia to Egypt to Morocco to Syria, in the MENA region have become dependent on investment flows from almost a single source: UAE. In 2008, UAE announced two large real estate development plans in Iraq, which together accounted for 58 percent of new investment in the country that year. Considering that the other major concessions are service agreements in oil and gas, that number gets even larger if you isolate only for foreign direct investment.

Relying on Emirati money was not a bad bet between 2003-2008. The Egyptian and Jordanian macro economies grew at rapid in the former case and strong in the latter case rates during this period largely on the back of privatization proceeds and FDI inflows. Egyptian growth rates topped 7 percent for several quarters. Not bad for an economy that was stuck at an average of 2 percent (more or less) for close to a decade.

The bigger problem here, though, is that as the UAE economy begins to slow down (and tries to avoid a meltdown in the case of Dubai), its taste for overseas expansion is sure to wane. The most recent estimates for the UAE is that at more than half of its own domestic construction projects have been put on hold or shelved entirely with more expected this year. Emaar Properties, the country's leading real estate development firm, was recently downgraded by Standard & Poors and given a negative outlook. It has already shelved a couple of international projects, including one in Indonesia. DAMAC Properties, one of the firms investing in Iraq, has not appeared to slowdown yet, announcing earlier this month its intentions to sign $545 million in new contracts this year but it has added new fees to its agreements and laid off 200 employees late last year.

Finally, from a development perspective, relying on real estate ventures to diversify your economy has always been a dicey bet, even for the rest of the region. One could plausibly argue that in the best case scenario (in this case Egypt is a good example), real estate usually brings with it other money, especially if privatizations are in the offing. Egypt has had a tremendous amount of investment in the real estate sector but it also has been able to attract Gulf money into other industries, notably oil and gas, food processing, and transportation/logistics. If Iraq could accomplish similar interests, Gulf money is not something to look askance at. But if Iraq is only to become another Syria or Lebanon where most of the money remains in real estate (largely because of a continued distrust of foreign investment in those markets and a government unwillingness to allow for more sectors to go on the chopping block) and is subject to the whims of the global credit crunch and the saturation of real estate projects in the region, we should expect Iraq to benefit little from the new investment.