In this discussion paper for Consultancy Africa Intelligence, a South Africa-based research and analysis firm, Adam Choppin sheds light on the recent border frictions in Central Africa and their implication for regional security.
Ian Bremmer, President of the Eurasia Group and the godfather of modern political risk analysis, discusses Iraq’s inevitable future as a middle class, middle income country.
In an interview given last January and published in April, Adam Choppin discussed macroeconomic trends and FDI prospects in Brazil and Latin America with Renzo Dasso of BNAmericas.com as a part of their “Infrastructure Intelligence Series”. The full report is available for a fee at: http://member.bnamericas.com/store/view_item.jsp?idioma=I§or=5&sku=71I1078813, but some excerpts are included here:
For Adam Choppin, president of US-based political risk consulting firm Fronteira Global, Latin America is absolutely attractive to foreign investors despite any specific turbulences.
“You have to look at any place where you can earn a 20 or 25% IRR. Frankly, I do not care if it is in Iraq, Venezuela or Brazil, you have to turn your head. Unless you are specializing on 40% IRR projects,” he says.
“In Latin America, there are many stable places without the downsides of other locations. And most importantly, you have good talent pools of local workers. This is what sets the region apart,” he adds.
While investors may think they need safeguards to do business in the region –namely, political risk insurance – Adam Choppin is quick to disagree. “I am perfectly comfortable with certain countries, but this depends on the company’s portfolio. For most private equity funds, which can spread across a dozen countries, it does not really make sense,” he says.
“At 0.75-1% a year, if you have 20 projects in 12 countries, you are diversifying your risk enough to have a pretty good hedge,” the analyst adds.
“You do not really invest in a region. You invest on a stock market, a particular equity, or take a portfolio position,” Choppin says, adding: “In general, taking political risk insurance is not necessary to do business in Latin America.”“The availability of core, sovereign and political risk insurance has actually gone down in price for most of Latin America, except for Venezuela and maybe Colombia. You can probably get it for less than 100 basis points, and even 60 basis points if you push it,” he says.
Further Excerpt:
See below for the exact email exchange between Fronteira Global President, Adam Choppin, just returned from Iraq, and Lehigh University Professor Frank Gunter, who has been quoted in several recent media stories overplaying (or at least misrepresenting) Iraq’s economic situation.
Prof. Gunter,
Interesting article, and interesting NPR story. I was in Baghdad just two days after that story aired, and subsequently in Erbil meeting almost exclusively with my Iraqi clients and counterparts (which could generally be described as the “entrepreneurial classes of Iraq”), and I can say for certain that their core concerns and priorities are far removed from the image you paint in your interviews. I still agree that the issues you outline on corruption and the business environment are inhibitors to growth, but all my contacts agreed that such issues are merely speed bumps on the inevitable road to growth.
In any event, your numbers for the surplus appear to only account for the DFI, which only accounts for a small fraction of Iraq’s overall budget surplus, which despite Iraq’s “paper deficit” continues to grow due to poor budget execution. Indeed, SIGIR confirms this point (http://www.sigir.mil/reports/quarterlyreports/Oct09/pdf/Section2H_Economy.pdf#view=fit) as does a direct review of Iraq’s own budget statements (http://mof.gov.iq/ar/index.php?name=Pages&op=page&pid=53), which show growing surpluses in both 2008 and 2009.
As for your prediction that it will take until 2012 for the Iraqi economy to grow, that is already been proven false, as Iraq has been growing between 4-7% for the past 3 years, and even the conservative IMF projects Iraqi GDP growing at an average of 7% for the next five years, and their estimates only account for modest increases in oil production, and not the tripling or quadrupling which even you seem to understand is inevitable.
We could banter about this interminably, but if you want to bet against the Iraqi economy in such a major way as your predictions and naysaying suggest, I’m willing to take that wager any day of the week. Indeed, I’m already putting my money where my mouth is having shifted my company’s entire investment practice to focus exclusively on Iraq for the foreseeable future. If you can’t see this train coming, best of luck spotting the world’s next economic shooting star.
Best Regards,
Adam Choppin
President
Fronteira Global
Business: +1-202-657-5873
Int’l Mobile: +1-203-887-1937
From: Frank R. Gunter [mailto:frg2@Lehigh.EDU]
Sent: Wednesday, December 30, 2009 10:20 AM
To: Adam Choppin
Subject: Re: Liberate Iraq’s Economy
Adam,
Appreciate your comments on my op-ed about business regulation in Iraq. I also made a similar argument in an NPR interview earlier this month (see attached).
I think that you are overly optimistic about the future of the Iraq economy. I spent twenty-five months in Iraq with a great deal of time spent on issues of budget execution and I think that your $70 billion fiscal reserves figure is greatly exaggerated. First, the accumulated surpluses for 2006-2008 were about 27,200 billion dinar (roughly $23 billion). And, as you know, the GoI probably ran a deficit this year. In addition, about $18 billion of the reported fiscal “reserves” is deposited in Iraqi banks and represent budget “commitments” that have not yet been disbursed – float in other words – that is not readily available for spending for another purpose. Finally, while converting a large portion of the CBI’s FX reserves into budget funds is legal, it is unlikely. The CBI realizes that the stability of the dinar (and therefore its anti-inflation policy) is a function of holding large FX reserves. If a significant portion of these reserves are converted then the IMF expects the value of the dinar to collapse. In fact, the 2007-2008 IMF SBA with Iraq discouraged/forbid such conversion.
Also, the GoI is in continuing negotiations with the IMF for a substantial loan in 2010. Since the accompanying restrictions are very unpopular in Iraq, it is unlikely that the GoI would accept a new IMF agreement except for the fact that it really needs the money.
With respect to the future price of oil, I think that your “trend towards $100″ is very optimistic. This morning’s WSJ shows 2010 oil futures prices (Brent ICE) of between $78 and $83.50. In view of the large worldwide oil/fuel supply, the delay in the economic recovery of the major industrial states and the recently reported drop in China’s oil imports, I’m surprised oil prices are as high as they are. If I was a betting man, I would expect a spot price of $50 per barrel before mid-summer 2010. And, as you know, Iraq only nets about 90% of the market price. So if the MoF announces a $50 a barrel break-even price that translates into roughly a $55 a barrel world price. In fact, if you add up all of the budget changes that have been announced, the GoI needs an oil price of about $60 pb (about $66 pb world price) to keep the 2010 deficit to $12 billion or less.
If the plan to sharply increase the volume of oil exports is successfully executed then Iraq should experience high – if unevenly distributed among sectors – real economic growth beginning in 2012-2013. But the point of my editorial is that Iraq has to first get through 2010!
Once again, I appreciate your thoughtful comments on my editorial.
Frank
The following Letter to the Editor was submitted to the Daily Telegraph (UK) on Nov. 24, 2009, following the publication of “China Pumping Millions into Afghanistan” by Ben Farmer on Nov. 22, 2009.
In Ben Farmer’s Nov. 22 article “China pumping millions into Afghanistan”, Mr. Farmer referred to the Aynak and Hajigak deposits as “in deprived areas that are currently dominated by the Taliban”. For at least the Hajigak deposit, this couldn’t be further from the truth. The Hajigak deposit is squarely in Bamiyan province, one of the least (if not the actual least) Taliban-friendly province in the country. Bamiyan, where famously the Bamiyan Buddhas once stood, before the backwards Taliban destroyed these historical icons, is also home to the Hazara people, the group who probably suffered the greatest at the hands of the Taliban during their previous reign. Indeed, it is partly for this reason that the Hajigak deposit was even considered by the iron majors of the world last year, although all ultimately opted not to submit formal bids for the project.
Adam Choppin
Athens, Ohio, Nov. 24, 2009
The writer is a former U.S. official covering Afghanistan and now President of Fronteira Global Consulting, which assists companies to work in Afghanistan and other frontier markets in the Middle East and Africa.
This interview with CNBC was given on Oct. 20, 2009 at the U.S.-Iraq Business & Investment Conference in Washington, DC. It aired live on CNBC’s “Squawk On The Street”.
The following Letter to the Editor was submitted to the New York Times on Nov. 17, 2009, following the publication of “Liberate Iraq’s Economy” by Frank Gunter of Lehigh University on Nov. 15, 2009.
Your recently printed Op-Ed article by Prof. Gunter (Liberate Iraq’s Economy, Monday, Nov. 16) is right to call for an improvement to Iraq’s commercial regulations, but is dead wrong in its economic assessment of the country. The aspersion that “in 2010, the Iraqi government will hit the wall” due to “low oil prices” and “exhausted cash reserves” is simply specious. The Iraqi government still has reserves in excess of $70 billion, or the equivalent of an entire year’s budget, just based on consecutive years’ of ineffective budget execution, which will not reach 100% this year either. And that doesn’t include the Central Bank’s estimated $45 billion in reserves either. Finally, the notion that $80 with a trend towards $100 constitutes a “low oil price,” contravenes generally accepted market wisdom, and is certainly not low for Iraq, who’s effective “break-even point” is about $50/barrel.
While Iraq would surely grow faster if the commercial regulatory environment was less onerous, more transparent, and less susceptible to corruption, the miracle of Iraq is that despite that, it will nonetheless be among the very fastest growing economies in the world over the next five years (see below or in attached for IMF data).
Adam Choppin
Athens, OH Nov. 17, 2009
The following Letter to the Editor was submitted to the New York Times on Oct. 2, 2009, following the publication of “Putting the ‘I’ in Aid”, by Peter Bergen of the New America Foundation in the New York Times on the same day.
Peter Bergen’s Oct. 2 article suggesting that foreign contractors pay Afghan tax is such a good idea, that the Afghan Government already instituted that policy last Winter. All foreign contractors in Afghanistan are subject to Afghan corporate income tax, as are all contractors whose income “has its source in Afghanistan” (www.mof.gov.af). Of course, since most donors don’t want 20% of their aid spending managed by the corrupt Karzai Administration, they have negotiated exemptions to this rule for their prime contractors, although such exemptions are highly regulated by the Afghan Ministry of Finance, and sub-contractors are always taxed, regardless. Good idea, just can’t say it’s Mr. Bergen’s…or even particularly newsworthy ten months later.
Adam Choppin
Athens, Ohio, Oct. 2, 2009
This Op-Ed piece was originally “published” on Salon.com on February 27, 2009. Since its publishing the State Department has finally moderated the language in its Travel Warning for Iraq to reflect the positive security environment in Kurdistan, albeit slightly.
by Adam Choppin
Obama Administration officials looking for a cheap and easy stimulus package to create jobs at home and curry favor in the Middle East should pay attention. The Bush Administration departed having failed to address a few arcane, but important, administrative barriers that are preventing U.S. companies from grabbing a larger share of Iraq’s growing market. By enacting a few policy changes that require only executive authority, the Obama Administration could boost the economy and curry favor with Iraq’s politicians and economic elites. But it must act quickly before these pivotal Iraqis turn their backs on U.S. companies in favor of European, Chinese, and Arab firms.
With violence on the ebb, oil exports up, newfound competence on budget execution, and a clear path to control over its security, Iraq is finally on the brink of its long-promised economic boom. Infrastructure expenditures and other investments in Iraq will top half a trillion dollars over the next ten years, about as much as the war has cost American taxpayers to date. U.S. companies could easily grab roughly 20% of that business, or about $100 billion. Iraq urgently needs oil equipment, software, medical devices, agricultural machinery, and a host of other goods and services for which American companies are competitive globally. Moreover, Iraqi businessmen thirst for quality American goods and services.
While not the only measures that could improve U.S.-Iraqi business ties, these nearly costless initiatives could yield massive returns for political relations and U.S. businesses:
Visas: Augment facilities and staff to process visas for Iraqi businessmen and government officials. Business visas are by far the number one impediment to greater U.S.-Iraqi business ties. The obstacles are two-fold: 1/ insufficient facilities in Iraq to handle visa interviews; 2/ insufficient staff in the U.S. to screen applications. The result is a process that sends most Iraqi businessmen to third countries to get visas that take between four weeks and six months to process. Meanwhile Britain, Germany, and other countries are expanding their consulates in Iraq and accomplish equivalent screenings in less than a week. It is no coincidence that British and German companies are beating American companies to Iraq’s growing market. Iraqi businessmen and government contracting officers see U.S. visa policy as deliberately disrespectful and unwelcoming. For around $10m/year, nearly all of which would go towards additional American jobs, the Obama Administration could hire the necessary screening agents and consular staff to meet demand and facilitate business.
Travel Warning: Change the travel warning against Iraqi Kurdistan. The Kurdistan Region of Iraq has consistently shown its competence in preventing violence and securing its people. Since 2003, the region has seen only two significant bombings, just one more than either Madrid or London (and with fewer overall casualties). Yet the State Department refuses to modify its travel warning, as Britain, Germany, Japan and other countries have done. Since insurance underwriters and corporate lawyers often formulate corporate travel policies around State Department travel advisories, this failure imposes a direct constraint on business ties, in addition to secondary perception effects. State Department bureaucrats recognize such sub-national differences elsewhere (Philippines, Pakistan, Congo, etc.), but a culture of fear and blame at the staff level has provided no incentive to author any changes absent senior leadership.
Export Guarantees: Expand export financing to Iraq. The U.S. Export-Import Bank (Ex-Im), which provides critical export insurance and financing to U.S. manufacturers and exporters, remains closed in Iraq. Distressingly, the obstacle concerns bureaucratic reporting rules and squabbles over Iraqi debt policy among U.S. Treasury Department staff. The absence of Ex-Im in Iraq is particularly debilitating at this time of shortages in global credit, which hit small to medium-sized exporters hardest. Ex-Im activities are critical to jumpstarting U.S. exports in emerging markets and is a self-funded government activity.
More than just business is at stake in Iraq today. Close business ties with the Iraqi commercial class, a cross-section of elites and middle-class managers across Iraq’s political and sectarian spectrum, would strengthen moderate voices within Iraq over the long-term. Administrations change every 4-8 years, diplomats every 2. Business relationships often last a lifetime, and corporations look at 10 or 20-year horizons for their market strategies. Even if Iraqis and their government never actively like us, they won’t actively oppose us if their leaders and commercial classes understand us, work with us, visit our country and are visited in turn. At best, such ties can create a rare and pivotal political ally in the region.
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From 2006-2008, Adam Choppin served in the Commerce Department’s Iraq Investment and Reconstruction Task Force, which led U.S. commercial policy towards Iraq. He is now President of Fronteira Global Consulting (www.fronteiraglobal.com), which assists U.S. companies to find new business opportunities in Iraq. He is also an Adjunct Professor of International Management at the Ohio University College of Business.