Country Report Iran March 2017

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Country Report Iran March 2017 _________________________________________________________________________________________________________________________________________________________ Country Report Iran Generated on November 13th 2017 Economist Intelligence Unit 20 Cabot Square London E14 4QW United Kingdom _________________________________________________________________________________________________________________________________________________________ The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For 60 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. London New York The Economist Intelligence Unit The Economist Intelligence Unit 20 Cabot Square The Economist Group London 750 Third Avenue E14 4QW 5th Floor United Kingdom New York, NY 10017, US Tel: +44 (0) 20 7576 8181 Tel: +1 212 541 0500 Fax: +44 (0) 20 7576 8476 Fax: +1 212 586 0248 E-mail: [email protected] E-mail: [email protected] Hong Kong Geneva The Economist Intelligence Unit The Economist Intelligence Unit 1301 Cityplaza Four Rue de l’Athénée 32 12 Taikoo Wan Road 1206 Geneva Taikoo Shing Switzerland Hong Kong Tel: +852 2585 3888 Tel: +41 22 566 24 70 Fax: +852 2802 7638 Fax: +41 22 346 93 47 E-mail: [email protected] E-mail: [email protected] This report can be accessed electronically as soon as it is published by visiting store.eiu.com or by contacting a local sales representative. The whole report may be viewed in PDF format, or can be navigated section-by-section by using the HTML links. In addition, the full archive of previous reports can be accessed in HTML or PDF format, and our search engine can be used to find content of interest quickly. Our automatic alerting service will send a notification via e-mail when new reports become available. Copyright © 2017 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 2047-5020 Symbols for tables "0 or 0.0" means nil or negligible;"n/a" means not available; "-" means not applicable Iran 1 Iran Forecast Highlights Outlook for 2017-21 3 Political stability 4 Election watch 4 International relations 5 Policy trends 5 Fiscal policy 6 Monetary policy 6 International assumptions 7 Economic growth 8 Inflation 8 Exchange rates 8 External sector 9 Forecast summary Data and charts 10 Annual data and forecast 11 Quarterly data 12 Monthly data 13 Annual trends charts 14 Monthly trends charts 15 Comparative economic indicators Summary 15 Basic data 17 Political structure Recent analysis Politics 19 Forecast updates 21 Analysis Economy 25 Forecast updates 29 Analysis Country Report March 2017 www.eiu.com © Economist Intelligence Unit Limited 2017 Iran 2 Highlights Editor: Robert Powell Forecast Closing Date: February 27, 2017 Outlook for 2017-21 Iranian politics will become increasingly polarised as the president, Hassan Rouhani, seeks to use the 2015 nuclear deal and the strong showing of his supporters in the 2016 legislative election to eclipse the country's hardliners. Despite the new US administration's hostility to the nuclear deal (and intro duction of new sanctions), we expect Iran to remain committed to its terms in order to retain the economic gains of the agreement and to isolate the US. With the economy struggling because of low—albeit recovering—oil prices, the government will seek to take advantage of the lifting of sanctions and attract inward investment, with a focus on the oil and gas sector and infrastructure. We expect Iran's fiscal account to record modest (but widening) deficits in 2017-21 as a ramping-up of capital spending is partly offset by rising oil revenue on the back of higher prices (compared with 2016) and output. Real GDP growth in Iran is set to surpass that in the rest of the Middle East as (non-US) inward investment rises. We expect growth to pick up from an estimated 4.6% in 2016/17 to an annual average of 5.6% in 2017/18-2021/22. We expect the official rial rate to weaken markedly in 2017, in line with the government's plan to merge it with the market rate. But the pace of depreci ation will slow thereafter, with the rial averaging IR48,357:US$1 in 2021. We forecast that the current account will remain in surplus in 2017 21, buttressed by rising oil and non-oil exports, which will partly offset a growing import bill (on the back of pent-up demand and rising investment. Review On February 15th Mr Rouhani visited Oman and Kuwait. Although Iran and the Gulf Co-operation Council have common interests in oil and gas, regional geopolitical disagreements remain stark. On February 21st Russia's first deputy prime minister, Igor Shuvalov, visited Tehran to negotiate a free-trade deal between Iran and the Eurasian Economic Union. His visit came against a backdrop of growing Russian- Iranian bilateral trade, which increased by 60%, to almost US$2bn, in 2016. According to the central bank, the fiscal deficit widened to IR269trn (US$8.7bn) in the first nine months of 2016/17 (March 21st-December 20th). In response, the government has continued to pare back capital spending. A French supermajor, Total, has cautioned that its final investment decision on developing Phase 11 of the South Pars gasfield is dependent on the US administration maintaining its commitment to the JCPOA. Inflation rose to 9.6% year on year in January, led by rising foodstuffs prices, and prompting the government to reduce agricultural import tariffs. Country Report March 2017 www.eiu.com © Economist Intelligence Unit Limited 2017 Iran 3 Outlook for 2017-21 Political stability Iranian politics will become increasingly polarised in the lead-up to (and, most likely, in the wake of) the presidential election in May 2017. The president, Hassan Rouhani, will seek to build public support for social and economic reform. In particular, he will attempt to leverage the 2015 Joint Comprehensive Plan of Action (JCPOA)—the international agreement over Iran's nuclear programme—to tackle vested interests, combat corruption and attract much-needed foreign investment. However, his reformist drive and diplomatic outreach will be threatened both by resistance among hardliners in Iran and by the presidency of Donald Trump, whose administration is adopting a far more confrontational approach with Iran than its predecessor. This US stance will encourage Mr Rouhani's opponents in Iran, who fear that the JCPOA might precede broader political change. Amid this in fighting, the position of the supreme leader, Ayatollah Ali Khamenei, will be crucial in maintaining stability. He will seek to strike a balance between the two sides: generally supporting the JCPOA and being non-committal on foreign investment, while maintaining a hostile stance towards social and political reform and the US. However, such an uneasy balance will prove difficult to maintain. In particular, the heightening of confrontational rhetoric between Iran and the US after Mr Trump's inauguration in January—and the subsequent introduction of new US sanctions— will see increased pressure from Iranian hardliners to withdraw from the JCPOA. The Economist Intelligence Unit expects Ayatollah Khamenei to stick with the JCPOA, however, reflecting a desire not to jeopardise rising investment from abroad and a calculation that Iran has an opportunity to divide the US from other world powers (which are likely to remain committed to the agreement). Nevertheless, even assuming a Rouhani victory in the election, the hardliners will continue to interfere in daily decision-making, with, notably, the intrusions of the unelected Guardian Council (a vetting body dominated by hardliners) proving a continual source of irritation for the president and his pro-business cabinet. This situation will be exacerbated by the unpredictable interventions of the Islamic Revolutionary Guards Corps (IRGC) in the country's political and economic spheres, as well as the residual dominance of vested business interests. As a result, political and social reform will be stifled, and economic liberalisation will proceed inconsistently. Amid these political machinations, speculation about the position and future of Ayatollah Khamenei will increase, reflecting his age and the state of his health; the 77 year old underwent prostate cancer surgery in 2014. Against this backdrop, we expect the supreme leader's attention to shift increasingly towards managing his succession. However, the identity of Ayatollah Khamenei's potential successor remains uncertain, with the orientation of the Assembly of Experts, which selects the supreme leader, highly unclear; although reformists performed strongly in the February election, the body subsequently chose a hardliner, Ayatollah Ahmad Jannati (who is also head of the Guardian Council), as its chairman. However, Ayatollah Jannati is too old to be a realistic prospect for supreme leader (he is around 90), and so Ayatollah Khamenei's successor will almost certainly come from the next generation; possible candidates range from hardliners such as Ebrahim Raeisi (aged 55, who heads the powerful Imam Reza Foundation in Mashhad and is an ally of Ayatollah Khamenei) and Ayatollah Mahmoud Hashemi Shahroudi (67, a former chairman of the Assembly of Experts) to centrists such as Mr Rouhani himself (67).
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