Investment and products from abroad begin flowing—along with oil

By Stanley Reed and Nayla Razzouk 

Boosting private investment won't be easy. Officials were "raised in a statist environment"

Customers heading for a Baghdad branch of Dar Es Salaam Investment Bank know the drill. You walk through the entrance and heavily armed guards stop you. You get body-searched at least twice. And your phone is taken away before you reach a teller. Mobile phones, of course, can trigger bombs or send a signal to armed accomplices.

Yet Dar Es Salaam (known as DES) is thriving as Iraq begins to show signs of life. Profits have grown from about $600,000 in 2004 to more than $16 million. HSBC (HBC), the giant international bank that bought 70% of DES in 2005, feels so confident that it may put its own brand on the banks. "We think the timing is right," says James Hogan, HSBC's country manager. "Iraqis are starting to reconnect to the outside world."

Seven years after the ouster of Saddam Hussein, Iraq has changed. Yes, convoys of SUVs packed with heavily armed security men still roar down Baghdad's busy streets. Armed gangs still prey on truckers. Iraq's political class struggles to form a new government. The few expat managers in the country live like prisoners: Every night, HSBC's Hogan holes up in a walled compound run by a security company.

Ordinary Iraqis, however, are living more normally than they have in years. Shops on Saadoun and Karrada Streets are filled with flat-screen TVs, computers, and clothing from China, Turkey, Iran, and Korea. Pedestrians have to step around the Turkish and Iranian refrigerators and stoves piled outside. At night many Baghdadis relax watching one of the privately owned television channels that have sprung up, or checking the latest Iraqi Web sites.

Oil money from rising production is powering growth, as is pent-up demand for housing and better infrastructure. Now that the government has awarded oil-field contracts worth billions of dollars to BP (BP), ExxonMobil (XOM), China National Petroleum, and others, foreign clients are besieging Hogan for help in financing everything from pipelines to power grids to workers' camps. Suppliers are following in the majors' footsteps: Weatherford (WFT) for drilling, Centrilift (CAM) for pumps, Cameron for valves. The International Monetary Fund figures the economy could grow 7.3% in 2010. In 2003 the economy barely had a pulse.

The central bank, buttressed by the IMF, has stabilized the dinar at about 1,170 to the dollar (it was once 1,500) and has lowered inflation to single digits from a peak of 80% in 2006. Foreign reserves stand at about $50 billion. "This definitely gives predictability," says Marcel Cobuz, Iraq general manager of Lafarge, the French building-materials maker.

Lafarge gained its two Iraqi cement plants, both located near Sulaimaniya in Kurdistan, through its acquisition of Egypt's Orascom Cement in 2007. From this relatively safe base—Lafarge has never experienced a security incident—Cobuz is expanding into the trickier center and south of the country. Lafarge now sells almost half its 5-million-ton annual output in Iraq to construction companies in the Baghdad area. Figuring demand for cement can only grow, Cobuz may next buy derelict state-owned plants, refurbish them, and boost production. Construction, he reckons, will be up 15% this year.

One by-product of the regime's fixation on oil is that it has done little to encourage private investment, says Ali Allawi, a former Finance Minister: "[Officials] were raised in a statist environment. They don't see the connection between private-sector investment and reducing unemployment." Entrepreneurs who lack the funds to modernize their businesses struggle against better-financed rivals. Thabet Al-Beldawi, 80, owns an aluminum plant in Baghdad. He's down to 85 employees from 250 since the fall of Saddam Hussein. "There is a growing demand," he says. "But the market is full of cheap imports." Sami Al-Araji, chairman of the National Investment Commission, says the government is now "trying to emphasize the role of the private investor."

The most encouraging thing about Iraq is that outside investors press on. Schlumberger, the oil services company, is quickly moving $100 million into Iraq, in part to build a base camp that will employ 300 workers. Iraq Oil Minister Hussein al-Shahristani, who negotiated with the oil majors last year, thinks the oil fields will eventually generate 100,000 Iraqi jobs. Schlumberger's top brass are primed to hire: They figure the country is a Saudi-size opportunity and that up to 100 drilling rigs will be needed for what could be the biggest oil boom of all. The Iraqi people are ready.

The bottom line: Foreign direct investment is key to Iraq's revival, but the IMF figures less than $1 billion came in last year. That number could multiply fast.

Iraq's Economy Wakes Up -  Source