The Outlook for the Iraqi Dinar in 2018

No one has a crystal ball, so it’s impossible to make future projections with any real accuracy. But based on the current state of events in Iraq, and in countries in the region – as well as globally – we’re going to give our best estimate for the outlook for the Iraqi Dinar in 2018.

THE POLITICAL AND ECONOMIC SITUATION INSIDE IRAQ

The political situation in Iraq remains guarded, since the country continues to host a large number of divided factions. That makes the chance of full political unity remote. Yet there is increasing evidence that the political situation is stabilizing.

The Economist recently reported the following:

”Iraqi forces have made significant progress against Islamic State (IS) in 2017, with the jihadi group likely to be territorially defeated around end-2017. This, along with the swift retaking of disputed territories from the Kurds, following the late September independence referendum, place prime minister, Haider al-Abadi, in a strong position to win re-election in 2018.”

Though that reads like a guarded prognosis, it indicates a significant level of progress given the country’s history of political instability.

Meanwhile, the World Bank offered up some positive nuggets in its mixed-assessment of Iraq’s economy in 2017:

”Iraq’s economic outlook is expected to improve under the assumption of a more favorable security environment, and continued fiscal consolidation. The non-oil economy after three years of contraction is expected to rebound in 2017 due to improved security and higher non-oil investment spending…Oil production and exports are projected to return to their 2016 level in 2018 and 2019. Iraq’s oil export prices are projected to average US$47.4 per barrel in 2017, compared to an average of US$35.6 in 2016. Higher oil prices would reduce the overall fiscal and current account deficits to 4.4% of GDP and 4.5% of GDP in 2017…In 2016, overall growth is estimated to have reached 10% thanks to strong oil production.

The report does contain negative information as well. But given the precarious state of Iraq over the past 15 years, positive political and economic directions are starting to be achieved.

OIL AND THE IRAQI DINAR

As far and the way it’s most important product, oil is the key to Iraq’s stability, prosperity and future. Iraq’s current oil production is running at 4.3 million barrels per day, with a capacity of up to 5 million barrels per day.

This despite the fact that the country is participating in OPEC’s agreement with Russia, to cut oil production by 1.8 million barrels per day throughout the cartel. But perhaps what’s more significant is that the agreement is scheduled to end at the end of 2018. At that point, presumably Iraq would be in a position to begin increasing oil exports.

Despite the voluntary agreement to reduce oil production, Iraq’s oil production remains significantly higher than the 3.8 million barrels per day the country produced by the end of 2014.

The current global oil market has been characterized as “balanced”, with oil currently trading around the $65 per barrel mark. This is more than twice the less than $30 a barrel oil commanded in the early part of 2016. This steady increase from that recent low bodes well for both the economy and the political situation in Iraq.

Iraqi is the second largest oil exporter in OPEC, after Saudi Arabia. It has the world’s fifth largest oil reserves, at more than 142 billion barrels. Its reserves are exceeded only by Venezuela, Saudi Arabia, Canada and Iran. Its reserves dwarf those of Russia (80 billion barrels) and the United States (39 billion barrels).

While it’s clear that Iraq is benefiting from the current uptrend in both oil production and global prices, the real payoff would be more apparent should oil prices spike above $100.

There are a couple of geopolitical situations bubbling both locally and globally that could cause that spike to occur.

THE GEOPOLITICAL LANDSCAPE OF THE GULF REGION

Though the situation inside Iraq is stabilizing, the same cannot be said outside its borders. Iran remains a significant disruptive force, displaying increasingly belligerent behavior toward both Western nations and its neighbors. So much in fact, that Saudi Arabia and the Gulf Emirates are purchasing billions of dollars in new weapon systems to deal with the potential Iranian threat.

Syria presents another flashpoint. Though the combat of the past two years seems to be dying down, the country remains as unstable as ever. But perhaps more significantly, it’s become a point of geopolitical conflict between several countries. This includes Russia, Turkey, and the United States and its allies.

Russia currently holds the dominant position. But both Turkey and the US are pressing in closer. The potential for conflict in the country remains high, despite the apparent defeat of ISIS. It may be that the local threat has been suppressed in favor of a big power conflict.

Turkey presents yet another X factor. A longtime member of NATO and US ally, in recent years the country has been pursuing a more independent course. It’s pulling away from the US and NATO, while making overtures toward Russia. But at the same time, Turkey continues to build its military arsenal, purchasing weapon systems from the US, Russia and other countries. It’s also embarked on a significant program to build weapons domestically. Meanwhile, the country is flexing its military muscles beyond its borders, including Syria.

Given that the region has a long history of both political instability and military conflict, the eruption of either could cause the price of oil to explode, due to disruption in supply.

That would be bad for the region, but likely very positive for the Iraqi Dinar.

NORTH KOREA AND THE IRAQI DINAR

Though many thousands of miles from the Persian Gulf region, North Korea increasingly poses a threat to global stability. Though small and economically poor, North Korea has one of the largest military establishments in the world. In recent years, the acquisition of nuclear weapons and credible long-range delivery systems has made its military even more formidable.

Alongside the increase in its nuclear capabilities, North Korea is frequently threatening its neighbors, particularly South Korea and Japan. It’s threats against the United States are virtually a daily occurrence. The US cannot ignore that threat. If North Korea doesn’t already have missiles capable of reaching the US mainland, it seems likely they can reach Hawaii and America’s territories in the Western Pacific. This is causing the US readjust its global military strategy on a regular basis.

Even though a war in Korea is unlikely to reach the Middle East in any significant military sense, a major conflict there could affect events in the region.

The impact of North Korean aggression, or worse – a nuclear exchange – will almost certainly impact the price of oil. As a base commodity, the panic generated by a major war or nuclear exchange is likely to cause the price of oil to rise. It may do so on little more than fear of instability, or the prospect of a major supply disruption.

A variable in the Korea situation is potential alliances. China, and likely Russia, are North Korea’s major supporters. A conflict between the US and North Korea may not remain isolated. China and Russia may be drawn in, creating a nightmare scenario of a much wider war.

Then there’s always the possibility of Iran, being another radical regime, somehow entering the conflict in support of North Korea.

IRAQI DINAR REVALUATION IN 2018?

Each of the factors listed above has the potential to cause the value of the Iraqi Dinar to rise substantially from where it is now. That would increase the possibility of an Iraqi Dinar revaluation in 2018. The government may be in a position to do so, as demand for oil increases, and Iraq’s economic and financial situations improve in a matter of weeks or months.

The country’s improved finances would make revaluation both practical and logical. Under optimal circumstances, the Dinar might rise to major international currency status, as conditions decline in other parts of the world and the region.

There’s even a potential bullish indicator in the current projections that call for continued weakness in the Iraqi Dinar.

For example, the website Trading Economics has forecast a slight drop in the dollar exchange rate of the Iraqi Dinar by the end of 2018. From a current exchange rate of about 1180, their projection looks like this:

• End of the first quarter: 1203
• End of the second quarter: 1221
• End of the third quarter: 1241
• End of the fourth quarter: 1260

This is not an unusual projection early in 2018. But as is the case with all projections, it’s based on recent trends, and the assumption that those trends will remain in place at least through the end of the year.

But what we’re suggesting in this article is that those trends could take a radical turn. While it may seem unlikely based on the circumstances of the moment, major change can occur on very short notice.

The entire global geopolitical and economic situations are tightly stretched. A single significant disruption can start a domino effect. For example, a war in Korea could cause conflict or revolution in the Persian Gulf region.

SUMMING UP THE OUTLOOK FOR THE IRAQI DINAR IN 2018?

Though forecasters expect the current status quo to remain intact for the foreseeable future, it’s clear that the potential for a major shift is already in the works. Resource-based economies, like Iraq, tend to outperform the global economy during periods of worldwide stress and disruption.

Whatever the situation of the moment, the Iraqi Dinar seems poised to make a major advance anytime between next week in the next couple of years. All it will take is one of the global dominoes to tip, and the entire situation – and the future outlook – will change radically.

Having at least a small portfolio position in undervalued resource currencies, like the Iraqi Dinar, could prove to be a winning diversification very soon.