Tabaqchali: Tariffs, Oil Prices, and the Budget
By Ahmed Tabaqchali, Chief Strategist of AFC Iraq Fund.
Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News .
Tariffs, Oil Prices, and the Budget
The market, as measured by the Rabee Securities U. S. Dollar Equity Index (RSISX USD Index), was up 1.6% for the month, and 0.2% for the year. The market continued with the process of consolidating its gains that started in December, following a blistering 35.9% rally since late August, 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 of consolidation 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
( Source: Iraq Stock Exchange, Rabee Securities, AFC Research, daily data as of March 27th. Note: daily turnover adjusted for block trades 1)
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 April 4th, 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)
( Source: Investing.com , AFC Research, as of April 4th; U.S. Energy Information Administration ( EIA ), as of March 31st )
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 argued 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
( Notes and data sources3 )
Accordingly, estimating actual budget execution for 2025 can be made by using current market projections for oil prices2, 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.
The equity market, as measured by the Rabee Securities U. S. Dollar Equity Index (RSISX USD Index), having surpassed its 2014 peak by 7.1% by the end of March, has the potential to rally further reflecting the powerful dynamics discussed here over the last few months. However, significant risks remain given Iraq's recent history of conflict, extreme leverage to volatile oil prices, as well as the risk that the widening of the current Middle East conflict will not be contained and evolve to destabilise the region
Notes: 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).
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.
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, November 6th, 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.
Please click here to download Ahmed Tabaqchali's full report in pdf format .
Mr Tabaqchali ( @AMTabaqchali ) is the Chief Strategist of the AFC Iraq Fund, and is an experienced capital markets professional with over 25 years' experience in US and MENA markets. He is a Visiting Fellow at the LSE Middle East Centre, Senior Fellow at the Institute of Regional and International Studies (IRIS), and a Senior Non-resident Fellow at the Atlantic Council.
His comments, opinions and analyses are personal views and are intended to be for informational purposes and general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any fund or security or to adopt any investment strategy. It does not constitute legal or tax or investment advice. The information provided in this material is compiled from sources that are believed to be reliable, but no guarantee is made of its correctness, is rendered as at publication date and may change without notice and it is not intended as a complete analysis of every material fact regarding Iraq, the region, market or investment.
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Shafaq News
2 hours ago
- Shafaq News
Foreign oil staff partially evacuated from Iraq's Basra fields
Shafaq News/ Several foreign oil companies operating in Iraq's southern Basra province have temporarily withdrawn portions of their staff, the Basra Oil Company confirmed on Monday. The company noted that foreign personnel, particularly from BP operating in the Rumaila oil field, have been evacuated as a precaution. However, Iraqi technical teams have fully taken over operations, supported remotely by the original operators. In other fields, ENI reduced its workforce from 260 to 98 employees, who continue to operate the site alongside Iraqi staff, and Chinese companies managing West Qurna 1, Siba, and Faihaa have maintained full staffing levels with uninterrupted activity. Lukoil reported no changes to its staffing or field operations. Meanwhile, TotalEnergies has evacuated 60% of its personnel, but production continues without disruption. Basra, Iraq's primary oil-producing region, hosts numerous international firms working under technical service contracts. Any reduction in foreign staffing raises concerns over operational continuity and the country's export commitments, although officials have reiterated that Iraqi crews are capable of maintaining output in the short term. Earlier, a senior oil official, speaking to Shafaq News, attributed the departures to security concerns stemming from the conflict between Iran and Israel, as well as the heightened risks following the US strikes on key Iranian nuclear facilities in Fordow, Natanz, and Isfahan.
Iraqi News
3 hours ago
- Iraqi News
Eni reduces workforce at Iraq's Zubair oil field amid regional tensions
Baghdad ( – Italian energy giant Eni has scaled back the number of its employees at the Zubair oil and gas field in southern Iraq's Basra province as a precautionary response to heightened instability in the region. The decision follows a wave of airstrikes over the weekend, in which the United States joined Israeli efforts to target key Iranian nuclear facilities. The escalation has raised concerns about the potential for broader regional fallout in the Gulf, particularly in neighboring countries like Iraq, which hosts both Western companies and Iran-backed groups. According to Reuters, Eni is closely monitoring the situation and coordinating with local authorities to ensure the safety of its staff and operations. Zubair is one of Iraq's major oil fields and a critical part of the country's energy sector. Any disruptions or security concerns in Basra could have wider implications for Iraq's oil exports, which are vital to the national economy.
Iraqi News
3 hours ago
- Iraqi News
Iran's possible closure of Strait of Hormuz to affect Iraqi oil exports
Baghdad ( – Iraq will need to find alternatives to continue its seaborne oil shipments if Iran decides to close the Strait of Hormuz because of the recent developments in its war with Israel, which recently involved a US strike on Iranian nuclear facilities. Iran has vowed to shut a vital oil shipping channel in retribution for the deadly strikes carried out by the United States on three of its nuclear facilities, a decision that could have a significant impact on the world economy. The Iranian parliament decided on Sunday to close the Strait of Hormuz, a critical shipping lane responsible for transporting 20 percent of the world's oil and gas, in response to the US military operation known as 'Midnight Hammer.' According to Iranian media, the parliament's decision is not binding, and the ultimate decision must be made by senior Iranian security authorities. If Iran refused access to big tankers that transport oil and gas to major countries in Asia and Europe, oil prices would skyrocket, potentially destabilizing the world's economy. The Iraqi Minister of Oil, Hayan Abdul-Ghani, confirmed that Iraq's oil production and exports have not been affected. Iraq relies mostly on the Strait of Hormuz to transit the majority of its oil exports. Any disruption to this route might have major consequences for both Iraq's economy and the global energy market.
