The Iraq Stock Exchange (ISX) has witnessed remarkable developments over the past nine years, a reflection of the renewed economic vibrancy that Iraq is experiencing after decades of civil strife.
Since the bourse launched in April 2004, the number of listed companies has expanded by over 42% from 59 to 84 in 2013. Market capitalization of ISX also grew by 40% in 2011 and 23% in 2012, mainly due to the banking sector's growth, reaching USD 5 billion at the end of last year. It more than doubled to USD 10.2 billion as of February this year following the listing of Qatar Telecom affiliate Asiacell.
As ISX continues to whet investors' appetite, Rabee Securities expects major mobile telecom operators such as Zain Iraq and Korek Telecom to list in the next 24 months. This could result to the telecom sector having an even higher representation in ISX MCAP and trading volume.
Once dominated by the banking sector (80%), ISX has now seen 50% of its market capital constituted by the telecom industry. The reversal of fortune has led the 21 listed banks to account for 41% share in the bourse's current capitalization.
Aside from banking and telecom, other sectors trading on the ISX include industry (23 companies), hotels and tourism (10 companies), services (10 companies), agriculture (six companies), investment (eight companies) and insurance (five companies).
In the first two months of this year, average daily trading volumes reached USD 3 million, a far cry from the USD 2.1 million recorded in 2012, excluding cross transactions.
Local investors remain the major players in the Baghdad bourse market due to a lack of custody that has kept foreign investors on the sidelines. This issue also remains as a significant challenge for institutional investors. As a result, international players' shares in total trading volume plunged dramatically to just 6.2% in 2012 from 12% the previous year.
However, this did not altogether dampen foreign investors' interest in the ISX. During Asiacell's flotation, foreigners purchased 70% of the company's shares (representing 67.5 billion shares for a total of IQD1.48 trillion or USD 1.2 billion).
In a bid to address the custody issue, ISX published a letter on March 4 stating that no organization has applied to perform custody services for ISX clients, which makes the Iraqi Depository Center (IDC) the stock exchange's sole custody services provider. The letter, however, mentions ISX's intention to encourage Iraqi and non-Iraqi banks and financial institutions to apply to be the custodian for ISX clients.
"We believe the custody issue will be solved by the end of this year which will probably contribute to the liquidity with foreigners being more active in the market. This may also create new opportunities for the local companies to reach new financing sources while benefiting from foreign investors' expertise. The positive side effects of the rise in trading volumes might be a decrease in commissions, which may result in higher trading volumes afterwards; a continuing cycle," according to Rabee Securities.
ISX in retrospect
Formerly known as the Baghdad Stock Exchange, ISX began trading in 2004 using the traditional open outcry system where brokers gather round huge erasable boards to buy and sell stocks. In August 2007, the exchange was opened to foreign investors.
The open outcry system of trading proved acceptable to local investors, but did not quite appeal to foreigners. As a result, the bourse launched electronic trading in April 2009 and in November of the same year, trading sessions were increased from three to five per week (Sunday to Thursday).
In March 2010, the Central Bank of Iraq (CBI) announced a new policy, which set a minimum capital of IQD 250 billion for all private banks with an advised schedule of IQD 100 billion by the end of 2010, IQD 150 billion by end-2011 and IQD 250 billion by end-2012.
The new regulation aims to make private banks more active. In October 2010, CBI extended the deadline by six months for each target capital with the last set on June 2013. To date, 19 out of 21 listed banks have already reached the second target capital or are continuing the capital increase procedures.
So far only two listed banks have reached the target, Kurdistan International Bank, which has a paid-in capital of IQD 300 billion, and United Bank with IQD 250 billion. Mansour Bank recently decided in its general assembly to increase the capital from IQD 236 billion to IQD 250 billion.
We believe the deadline for the last target capital may be extended to the end of 2013. We also expect to witness mergers between the banks, especially those that are not able to gather capital independently. Banks with strong local or foreign shareholders would appear to have an advantage.
Another significant milestone in ISX's history was the listing of Asiacell stocks in February 2013, which resulted to the bourse doubling its market capitalization.
All of these activities can be attributed to the new-found zeal in Iraq's economy. Despite sporadic domestic tensions, Iraq has displayed a commitment to maintain macroeconomic stability. Its oil sector - which has one of the world's largest reserves - continues to attract investors from across the globe.
Robust growth in the oil industry, together with an improving security situation, stable currency and young population make Iraq an attractive destination for foreign direct investments. We believe that the positive view and growth expectation for Iraq will also impact ISX in a favorable way.
Aysegul Ozge Ozgur is senior vice-president for research at Rabee Securities, where she is responsible for publishing sector and company reports, as well as preparing updates on the ISX at a macro level.
© Zawya 2013
