Lebanon Pulse

Iraq's instability trouble for Lebanese investors

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Article Summary
Foreign investments in Iraq are at a standstill amid recent crises, with Lebanon's $3 billion worth of investments in the country set to decline if a political solution is not reached.

The last thing that the business sector in Lebanon needed was the recent worsening of the Iraqi crisis and its repercussions, especially on the security level. It is true that companies operating in Iraq, especially Lebanese ones, are used to security fluctuations and have adapted to them. But recent events are different with their wide geographical breadth and sectarian dimensions, factors that may have long-term implications.

At the beginning of the year, the Iraqi economy looked promising despite the political tension. The International Monetary Fund (IMF) predicted that it would grow by 6% in 2014. Oil production in February exceeded all expectations and reached record levels as it passed the 3.6 million barrels-per-day mark. But this was before the turmoil.

After the crisis began, those expectations were replaced by caution and concern.The Sunni uprising and simultaneous military actions affected key areas in the oil-production network, such as Kirkuk, Mosul and Beiji, where the biggest refinery in Iraq is located. Iraq, which has the world’s fifth largest oil reserves at 141 billion barrels, still mainly depends on oil production, which accounts for 95% of the government’s revenues. The events affected the global oil markets, as indicated by the fluctuations in crude oil prices that soon stabilized despite expectations that it could reach $150 a barrel.

But the events mostly impacted long-term investments, not only in terms of oil production, but also in sectors such as food and real estate. The political situation is reflected in sluggish investments in major projects, which are the Iraqi economy’s real growth engines and main impetus for the activity of the companies operating there, especially Lebanese companies.

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“Direct foreign investments are frozen,” Joe Sarrouh, an executive adviser to Fransabank, a Lebanese bank operating in Iraq, confirmed to Al-Monitor. He added, “It is premature to forecast the effects of these events on the Lebanese companies. The matter depends on developments in the field.”

It should be noted that Lebanese companies entered the Iraqi market with the start of the US embargo on Iraq and the adoption of the oil-for-food program in 1999. They benefited from the withdrawal of international companies and sought to fill the void by promoting their products and services.

Things changed in 2003 when the rebuilding phase started. The economic system opened up and the entire investment environment changed. The Lebanese saw several incentives to enter the Iraqi market despite the fragile security situation and instability.

The first incentive was Iraq’s major needs, especially in infrastructure, electricity, consumption, education and housing. Their total value is estimated at $400 billion to $600 billion. Housing needs alone for 2016 are estimated at 2.5 million units.

The second was the 2006 law to stimulate foreign investment. That law provided tax exemptions and guaranteed special rights for land ownership, investing in land and transferring money and profits abroad.

The third came from inside Lebanon. It is true that some of these companies went to Iraq in search for new markets but it is also true that some went because of the bad economic conditions and low growth prospects in Lebanon, especially in the last three years.

Most Lebanese companies settled in the Iraqi Kurdistan Region, as this area was the safest. The value of Lebanese investments in Iraq, according to a 2014 survey, reached $3 billion, or 10% of all foreign investments. Lebanese investments were distributed over various sectors such as banking, educational institutions, real estate and commercial distribution.

The recent events had different effects on different sectors. Consumption was the most affected, not because the locations of the unrest constitute key markets (“No more than 4% of the total Iraqi market,” said a businessman who wishes to remain anonymous), but because the violence split the country apart and hindered the movement and shipment of goods. So the problem is logistical rather than financial or commercial, at least for now.

In contrast, according to Sarrouh, the Lebanese banks operating in Iraq were mostly unaffected because they generally confined their work to “financing business trade and have not yet developed banking services for individuals,” so their risk exposure is low. Today they are in a wait-and-see mode. There is “no more than $2 billion in total left the Iraqi banking sector,” he said. So there’s no need for panic, but rather alertness. If the political crisis gets worse, then there will definitely be costs, at least in opportunity. But for the horizon to clear and for growth to return, a political solution is needed.

“The political class should quickly find a political settlement to restore things to normal,” said Sarrouh.

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Found in: lebanese economy, islamic state of iraq and al-sham, islamic state, iraqi markets, iraqi kurdistan region, iraq crisis, iraq ministry of oil, foreign investment

Sami Nader is a columnist for Al-Monitor's Lebanon Pulse, an economist, Middle Eastern affairs analyst and communications expert with extensive expertise in corporate strategy and risk management. He currently directs the Levant Institute for Strategic Affairs, focusing on the economics and geopolitics of the Levant, and is a professor for USJ University in Beirut. On Twitter: @saminader

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