BAGHDAD, 23 June 2003 — Capitalism can survive even in the most hostile places. Until the start of the war in Iraq in March, about 50 commission brokers used to gather three times a week in the main hall of the Baghdad Stock Exchange, BSE, to trade in the stock of some 100 listed companies.
These same brokers, with fueled expectations of boom times ahead, met again on June 7, not to trade stock, but to review the ongoing discussions with Baghdad-based US Treasury consultants assigned the task of overhauling BSE. Some brokers were talking about plans to introduce electronic trading. Others were more interested in legal reform and still others were looking forward to cross border operations. The overall spirit was one of cautious optimism mixed with fear of the uncertainties ahead.
For now the market remains closed, its downtown offices stripped to bare walls by looters in the aftermath of the war. Not deterred however, speculators are already exchanging stock behind the counter at prices reportedly several times higher than the closing prices of the last session on March 17, 2003. Reliable sources whisper that trade is no longer confined to Iraqi investors and that non-Iraqi venture capital has already entered the market. Analysts say that this same capital has led to soaring real estate prices in Baghdad.
Although BSE was established in 1992 with some 112 listed companies, not surprisingly its performance as an engine for capital development was extremely poor. Stock market capitalization on Dec.31, 2000 was a meager 591 billion Iraqi dinars or $394 million compared with $24.34 billion in Egypt and $9.09 billion in Morocco.
The market has been dominated by the manufacturing sector with trade in the shares of 34 such companies representing 78 percent of the total capitalized value of the market. Stock of the private banking sector, which comprises 20 or so companies, accounted for roughly 7 percent of the capitalized value.
The services sector, primarily the hotel business, accounted for about 10 percent. The rest of the shares belonged to agricultural companies, whose performance was miserable. The reasons for that are not difficult to pinpoint. Overall macro economic mismanagement, political corruption and a series of bloody and costly wars are obvious culprits.
Some companies, however, did show healthy balance sheets despite the negative economic and political climate. Certain of the manufacturing companies, with local inputs of raw materials and intermediate goods, had a clear production cost comparative advantage. Poor management and state controls stifled a more meaningful performance.
The same was true of the hotel business such as the celebrated Le Meridien and Sheraton hotels. For many years hard currency earnings of these hotels were confiscated by the state at undervalued exchange rates. The private banks, with activities primarily concentrated on retail banking, were also able to achieve acceptable return on investment.
Low capitalization value is also attributed to a state-imposed ban on Arab and other foreign investment in the market. According to BSE regulations, Arab investment is permissible, but a decree from the now defunct Revolution Command Council suspended all Arab investment.
Today there is a widely held view that all restrictions of the past regime are forgotten. Economic reform based on the premises of a free market economy is expected. Such reform coupled with good governance ought to transform the fortunes of most of the listed companies, especially those that succeed in installing efficient and honest management. Of course some companies will fair better than others depending on the real economics of each. Those with essentially bad economics based on direct or indirect government subsidies are likely to face the same fate as the former political regime. The fortunes of existing and potential shareholders and investors will be shaped accordingly.
Once the market is officially opened for trade, large capital movements between good and bad stock are sure to take place. Analysts say that the market will also see the float of shares of many state-owned companies when they are privatized. Financial analysts and market experts, who are scarce in Iraq, are in for very busy times ahead.