WASHINGTON, D.C. –The Overseas Private Investment Corporation (OPIC), the U.S. Government’s development finance institution, has selected Fronteira Global, a specialized investment advisory firm focusing on South America, the Middle East, and Africa, to serve as an originator for a growing alliance with the private sector designed to support small and medium-sized enterprises (SMEs) expanding into emerging markets overseas. 

For more go to: http://www.opic.gov/news/press-releases/2009/pr022312

Iraq’s Bright Future.

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

adam@fronteiraglobal.com

www.fronteiraglobal.com

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