A resurgence in foreign investment in Iraq is likely to be cut short by the advance of the Islamic State.
Greenfield foreign direct investment (FDI) into Iraq boomed last year as a period of relative stability attracted large-scale investment from petroleum companies.
But since the US launched air strikes on Sunni militant forces and EU leaders agreed to arm the Kurdish Peshmerga, Iraq’s attractiveness as a location for foreign firms was likely to suffer.
Iraq attracted the Middle East’s largest net increase in greenfield FDI last year, rising to US$14.96 billion last year from $960m in 2012, according to a report from Foreign Direct Investment Intelligence, which is owned by The Financial Times.
Iraq received 15 per cent of greenfield FDI in the Middle East and Africa, compared to 1.21 per cent the previous year.
Greenfield FDI differs from foreign direct investment proper in that it is a measure of new capital, plant and infrastructure projects built by foreign companies in a region.
It does not include investments to repurpose existing capital, plant or infrastructure. This means that it is arguably a better measure of investment that should boost an economy’s spare capacity and create new jobs.
Overall FDI to Iraq increased to “new heights underpinned by [Iraq’s] vast hydrocarbon wealth”, and was rising by about 20 per cent, according to the United Nations Conference on Trade and Development (UNCTAD).
But the rapidly deteriorating security situation might reverse this rosy picture.
Renewed US and EU intervention was likely to exacerbate the conflict, while the Islamic State’s gains have threatened the safety of foreign firms in Iraqi Kurdistan.
This month, Sunni militants captured the oilfields at Ain Zalah from the Iraqi Kurds. These fields are about 170 kilometres from Erbil, the seat of the Kurdistan regional government.
“Security in the semi-autonomous Kurdish region is in jeopardy as a result of the IS’s takeover of northern Iraq in June,” said a recent report from Business Monitor International, a research firm.
Exxon, Total and Gazprom all have operations in Iraqi Kurdistan, along with Abu Dhabi companies Taqa and Dana Gas.
Dana Gas said that production had been unaffected by security concerns, and that there had been no incident affecting their operations.
But the Iraqi News media outlet reported that BP and Exxon were both evacuating staff from the country.
“Oil majors are starting to withdraw from [Iraq], which would impact on oil production,” said Arjuna Mahendran, the chief investment officer of Emirates NBD Wealth Management.
Wayne White, a US state department official, told Bloomberg News that “mounting violence has frightened investors, physically damaged a large number of businesses and discouraged the exploitation of substantial hydrocarbon reserves known to lie under central Iraq”.
As investment in Iraq’s oilfields composed the largest percentage of investment in Iraq, according to UNCTAD, it was likely that hostilities would impede FDI inflows.
Standard Chartered cut its growth forecast for this year for Iraq to 3.5 per cent from 6 per cent, while cutting its forecast for next year to 6 per cent from 8.5 per cent. In June the International Energy Agency reduced forecasts for Iraqi oil production up to 2019.
Business Monitor International also cut its forecasts for growth in Iraq. In a recent report, it stated: “We have revised down our 2014 and 2015 economic growth forecasts for Iraq, given high risks of a return to sectarian civil war.”
Yields on Iraqi government bonds have risen 59 basis points since Islamic State fighters captured Mosul in June.
abouyamourn@thenational.ae
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