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Dear Investor,

The AFC Iraq Fund was up 0.3% in March 2025, underperforming its benchmark, the Rabee Securities U.S. Dollar Equity Index (RSISX USD Index), which was up 1.6%. For the year, the AFC Iraq Fund is up 0.1%, while its benchmark is up 0.2%.

The RSISX USD Index continued with the process of consolidating its gains that started in December 2024, following a blistering 35.9% rally since late August 2024, and just as in the past two months, spent the month in a tight range of -2.3% and +1.8% around its prior month’s close. While, this consolidation could continue over the next few weeks, the market’s technical picture continues to be positive, and the likely consolidation or pullback should be within its multi-month uptrend (chart below). Nevertheless, the process could extend towards the lower band of the uptrend, due to the uncertainty over the health of the global economy following the unveiling of the U.S.’s radical tariffs on its trading partners. The tariff’s direct impact on Iraq is almost zero, since oil constitutes almost all of its exports to the U.S., which are exempt from reciprocal tariffs, however, the impact will be indirect and felt through a lower oil price as a consequence of expected lower global demand for oil.

Rabee Securities U.S. Dollar Equity Index and Daily Turnover

This lower global demand for oil, was compounded by supply increases as a result of the unexpected OPEC+ announcement in the wake of the U.S.’s unveiling of tariffs, that the group will triple its planned production increase in May. The actual increase will in fact be much less as a function of over-production by some group members, and the tripling of production, so far, is planned only for May. Nevertheless, the clear implication is that the group’s planned unwinding of prior production cuts will proceed even in the face of the expected weaker demand for oil –versus the market’s prior expectations that OPEC+ will delay the unwinding of production cuts when demand is weak. This might seem illogical at first sight, but it will soften the tariffs and potential counter tariffs blow to the world economy, make up for the potential loss of Iranian oil from the U.S.’s tough measures, and help in stimulating the eventual global recovery. However, it’s negative for medium-term oil prices which, as measured by Brent crude futures contracts as of 4^th April 2025, have shifted (orange line, chart below) to the lower end of a three-year range –marked on the upper end by those of supply fears following the invasion of Ukraine (red line, chart below), and on the lower end by those following the emergence from COVID-19 at the end of 2021 (grey line, chart below).

Market Expectations for Future Oil Prices
As measured by Brent Futures Contacts (USD per barrel)

This decline in expectations for future oil prices (orange line, chart above), has negative implications for Iraq’s oil export revenues which in 2025 could translate to IQD 17.3 tn (USD 13.3 bn), or 16%, in less oil revenues than in 2024.² Notwithstanding this, it was asserted here in “Market Review for 2021 and Outlook for 2022” when expectations for future oil prices at the time were at the lower of this range (grey line, chart above), that they were positive for the country’s financial position in that they provide the government with the wherewithal to continue with expansionary economic policies. While prices at the upper end of the range allow for the accumulations of budget surpluses, and at the lower end require the issuance of domestic debt to fund budget deficits, yet the overarching theme was, and remains, is that over the next few years, the direction is for decreasing oil prices. Thus, as reasoned in “What Next after Two Gangbuster Years”, this implies increased debt issuance to augment government spending, that will play a big role in developing the country’s bond market, which, in turn, with the growth of the equity market, will contribute to the evolution of the country’s capital markets.

The government is yet to submit the updated budget tables for 2025 as part of the expansionary three-year 2023-25 budget. However, the projections should be for slightly increased expenditures and decreased revenues in 2025 over 2024 in line with the changes of 2024 over 2023; and as such would lead to a deficit of Iraqi dinar (IQD) 65.0-67.0 tn (USD 50.0-51.5 bn, based on the official exchange rate of USD = IQD 1,300). However, in practice, there is a world of difference between budget projections and actual budget executions, mostly due to the historically low execution rates of investment spending and the plodding pace of the Iraqi bureaucratic machine. In both 2023 and 2024, the budget called for a deficit of around IQD 64.0 tn (USD 49.3 bn), however, the actual budget execution was vastly different. Actual deficits were significantly lower than projected, and were financed by the cash balances at the Ministry of Finance’s (MoF) account at the Central of Iraq (table below).

Actual Budget Data 2022-2024

Accordingly, estimating actual budget execution for 2025 can be made by using current market projections for oil prices, and assuming actual expenditures would be 10% higher than those for 2024, which implies a budget deficit of IQD 35.8 tn (USD 28.0 bn). This would be easily financed through the issuance of domestic debt, increasing domestic sovereign debt from IQD 83.1 tn (USD 63.9 bn) at the end 2024 up to IQD 118.9 tn (USD 91.5 bn) by the end of 2025 –a better outlook than initially estimated a few months ago, primarily due to better than expected budget performance in 2024.

The 2025 budget, like that of 2023 and 2024, should continue to support the two key dynamics driving the transformation of the Iraqi economy, and subsequently the equity market. The first is the cumulative positive effects of the relative stability that the country has enjoyed over the past few years, which created a stable and predictable macroeconomic framework for businesses and individuals to operate in and to plan for capital investments on a scale last seen in the 1970’s and early 1980’s before the onset of the decades of conflict. The second is the significant structural fundamental development accelerating the adoption of banking and bringing about a transformation of the sector and its role in the economy.

We continue to believe that the upside opportunity for the AFC Iraq Fund will come about as the RSISX USD Index, having surpassed its 2014 peak by 7.1% by the end of March 2025, rallies further, reflecting the powerful dynamics discussed here over the last few months. However, risks remain given Iraq’s recent history of conflict, extreme leverage to volatile oil prices, as well as the risk that a widening of the current Middle East conflict will not be contained and evolve to destabilise the region.

Notes:

1. Daily market turnover is first adjusted by removing block, pre-arranged trades conducted during the special session following the regular trading session; subsequently, it is adjusted further by removing high-volume trades during regular market hours that show a pattern consistent with those of pre-arranged trades. High-volume trades are defined as those that are significantly higher than a given stock’s average daily turnover; and as such are subjective. Moreover, trading volumes, and trading turnovers are used interchangeably here, and defined as the values of trading turnovers in Iraqi dinars (IQD).
2. The figure is highly dependent on actual oil exports, which can vary depending on Iraq’s compliance with production agreements made by OPEC+, which in turn are likely to change further in 2025 depending on evolving oil market dynamics.
3. Budget data, budget specifics, and sources are based on “Iraq’s 2024 budget: Not what it appears when it first meets the eye”, Ahmed Tabaqchali, The Atlantic Council, 6^th November 2024. Data for budget execution for 2024 has been updated since then using actual MoF data up to November 2024 and making estimates for December 2024.

AFC Iraq Fund Marketing Information as of 28^th February 2025

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NAV as of 31^st March 2025 and performance table since inception

Regards
 
Ahmed Tabaqchali
Chief Strategist AFC Iraq Fund
This email address is being protected from spambots. You need JavaScript enabled to view it. 
 

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This Newsletter is not intended as an offer or solicitation with respect to the purchase or sale of any security. No such offer or solicitation will be made prior to the delivery of the Offering Documents. Before making an investment decision, potential investors should review the Offering Documents and inform themselves as to the legal requirements and tax consequences within the countries of their citizenship, residence, domicile and place of business with respect to the acquisition, holding or disposal of shares, and any foreign exchange restrictions that may be relevant thereto. This newsletter is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law and regulation, and is intended solely for the use of the person to whom it is intended. The information and opinions contained in this Newsletter have been compiled from or arrived at in good faith from sources deemed reliable. Opinions expressed are current as of the date appearing in this Newsletter only. Neither Asia Frontier Capital Ltd (AFCL), nor any of its subsidiaries or affiliates will make any representation or warranty to the accuracy or completeness of the information contained herein. Certain information contained herein constitutes “forward-looking statements”, which can be identified by the use of forward-looking terminology such as “may”, “will”, “should”, “expect”, “anticipate”, “project”, “estimate”, “intend”, or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of Funds managed by AFCL or its subsidiaries and affiliates may differ materially from those reflected or contemplated in such forward-looking statements. Past performance is not necessarily indicative of future results.

The AFC Iraq Fund is registered for sale to qualified/professional investors in Japan, Singapore, Switzerland, the United Kingdom, and the United States. The Fund has appointed Acolin Fund Services AG, Maintower, Thurgauerstrasse 36/38, 8050 Zurich, Switzerland, as its Swiss Representative. NPB Neue Privat Bank AG, Limmatquai 1 /am Bellevue, CH – 8024 Zürich, Switzerland is the Swiss Paying Agent. In Switzerland, shares shall be distributed exclusively to qualified investors.  The fund offering documents, articles of association and audited financial statements can be obtained free of charge from the Representative. The place of performance with respect to shares distributed in or from Switzerland is the registered office of the Representative.

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