Gulf banks are in no rush to do business in post-war Iraq, despite the potential spoils, says Indira Chand.
The fog of war may have lifted from Iraq but the country is now shrouded in the dust of political instability and uncertainty. One thing is certain, though: Iraq needs to be rebuilt and the cost of this reconstruction will be enormous, spreading over many years and encompassing every aspect of Iraqi life, from education to agriculture, from electricity and water to oil production.
Despite the magnitude of prospects offered by a country devastated by a war that followed 12 years of crippling sanctions, banks and corporates in the Gulf appear in no rush to grab the business and ring in the profits. While talk of the launching of this or that ‘Iraq fund’ or Iraq initiative abounds, there is little sign that banks are even positioning themselves for the Iraq opportunity.
Reasons for reticence
Is this reticence a fallout of the anti-war and anti-US sentiment that has dogged the war and ensuing occupation? Are Gulf banks shying away from what may be viewed as an unseemly jostle for the ‘spoils of war’?
Not really, says veteran Bahraini banker Murad Ali Murad, who recently took over chairmanship of the Bank of Bahrain and Kuwait (BBK), Bahrain’s largest commercial bank in terms of assets. “It is true that the public in this region and many countries around the world shares the view that this war was a unilateral action by the US and that the lion’s share of the Iraq reconstruction business will go to American corporates,” he says.
The region’s banking community recognises this reality. It is also knows that Iraq needs to be rebuilt in order to improve the lives of the Iraqi people.
“The real issue right now is that there is no legitimate Iraqi government, so who should we do business with?” says M. Murad.
Also, for any real deals to materialise, the focus for now will have to be on increasing oil production/exports to generate the revenues needed to finance the reconstruction. Oil production is expected to reach 1.5 million barrels per day (bpd) during June and 3.5 million bpd in the medium term. As a result, it could be another six months or more before the requirement for project finance emerges.
There is also the issue of outstanding loans, payments for which have fallen overdue. Although there are no industry statistics, the exposure of Gulf banks to pre-war Iraq was significant. Any delay in starting negotiations on restructuring those loans is hardly likely to infuse confidence among the banking community.
“A lot of things need to settle. We have plans [on Iraq] but we will not rush in,” says HSBC Bank Middle East chief executive officer Saleh Al Kowary. “Iraq is a very big country and the opportunities there will always be available.”
Massive opportunity
Indeed, the Iraq opportunity is massive by any standards. In its April 2003 report, Iraq – economic review and prospects, Kuwait’s Global Investment House says the cost of post-war reconstruction would be in the region of $50bn to $100bn. It notes that the US Agency for International Development (USAID) is the main agency awarding development contracts in Iraq and, under US federal law, the primary contracts funded by USAID have to be awarded to US companies.
Approval has, though, been granted for non-US companies to be awarded sub-contracts, the report points out.
Gulf businesses, however, are running the risk of getting only the crumbs if they wait too long for the dust to settle in Iraq, says Ernst & Young’s managing partner Tariq Sadiq. “Our strategy is to tell our clients and those contacting us to get in now, forge the alliances,” he says. At the very least, major Arab banks should be finding out who is the consortium for Halliburton, for example.
Unlike its clients, Ernst & Young has moved to set up a special secretariat in Kuwait to which Iraq inquiries received by any of the firm’s offices are directed. “We’re not shying away from offering our services. But, on Iraq, no one is utilising our services,” says Mr Sadiq. “Unfortunately, everyone is playing a wait-and-see game.”
This posture is certainly out of character for a region that is accustomed to conflict, which abounds with good entrepreneurs who like the risk-reward element and has a stake in getting Iraq and its people back on their feet. It would seem, however, that uncertainty, coupled with a reluctance to deal with a non-elected Iraqi government or the United Nations, is dampening spirits as people struggle with the morals and politics of the Iraq situation.
Uncertainty lifts
Moral or not, one effect of the war has been to lift the uncertainty that was affecting the rest of the region, says BNP Paribas regional treasurer Glyn Davies. “Since September 11, Paribas has been wary of the area and all of our projects (for the region) had been put on hold,” he says. A positive turnaround was made early in May, so business expansion in the Gulf is back on.
Citibank, too, felt confident enough to repatriate some $30bn worth of assets it had withdrawn from Bahrain last November, amid war fears. The assets, which were moved to the Bahamas as a temporary measure, were being rebooked to Bahrain in the middle of May.
Bond activity
Bond issuance activity has also been continuing apace in Bahrain. The Bahrain Monetary Agency (BMA), the country’s central bank, launched a $250m Islamic leasing (Ijara) issue in May, its third Ijara issue so far this year, and the first to be offered through a market-maker. The lead arranger and manager of the issue was the Liquidity Management Centre, while eight conventional and Islamic banks from Bahrain, Kuwait, Malaysia and the UAE were part of the consortium of underwriters.
A $75m corporate bond was issued by Bahrain’s First Islamic Investment Bank in April. The lead investor in the sukuk issue was The Securities House of Kuwait.
“With the Iraq war now over, we’re looking for a pick-up in business in the region,” says Mr Davies.
