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Iran Country Profile Iran Country Profile November 2015 Key Statistics A very enticing minefield GDP, US$ bl n* $415.0 Population, mln 77.8 “Yesterday I was clever, so I wanted to change the world. Today I GDP/Capita, US$ $5,334 am wise, so I am changing myself” GDP/Capita, PPP basis, US$ $17,150 Source: State Statistics Committee Jalāl ad‐Dīn Muhammad Rūmī, 13th Century Persian poet and scholar * 2015 – Year‐end as of 31 March Nuclear agreement may be a catalyst for change. The economic cost of sanctions led to shifts in the internal political balance of Iran. The lifting Key Macro Indicators* of sanctions and the expected inward flow of investment as a result of 2015 2016E that should further strengthen the pragmatic factions in the country. Growth, real % YoY 0.6% 2.5% Consolidated bdgt., % GDP ‐3.5% ‐3.0% Foreign investors will need to conform to local interests. Iran’s Unemployment, % eop 11.5% 12.0% concessions to unblock sanctions do not change important fundamental CPI ‐ average, % YoY 14.0% 12.5% differences between Western and Iranian ways of conducting business Curr. account, % GDP 0.4% 1.3% and government. Any investment project will need to conform to local state and business interests. Trade balance, US$ bln $20.0 $24.0 CB reserves, US$ bln* $120.0 $115.0 Whose interests might you harm? An important issue for investors will Sovereign debt/GDP % 11.0% 12.0% be to ensure that projects conform to the spirit as well as to the letter of CB refinancing rate 14.0% 21.0% the law, and what impact the project might have on the economic and Rial/US$, eop 27,700 30,000 political agenda of the Revolutionary Guard and the Bonyads (Trusts Source: Macro‐Advisory estimates, IMF which control 20% of GDP). * 2015 – Year‐end as of 31 March Potential oil sector recovery. We estimate that Iran can initially boost its * includes Sovereign Wealth Fund oil exports by 0.5‐0.7 mln barrels per day (mbd), including 0.2 mln barrels per day from an estimated 30 mln barrels of oil in storage, rising to a Tax Rates sustainable 1 mln barrels a day only if/when it can mobilize investment. Corporate tax 25.0% Total tax take, average* 44.1% Boosting gas exports will take longer. Iran sits on some of the world’s Personal tax** 15‐35% largest gas reserves, but developing this and boosting exports is expected to take between five and 10 years. Iran has just agreed a contract to Sales tax 7.0% import a much larger volume of gas (and electricity) from Turkmenistan. Source: Iran Government * World Bank survey Institutions already in place. A big difference between Iran and other ** Depends on income band post‐reform countries is that it already has banking infrastructure and a stock exchange, albeit only 0.1% of the listed stocks are foreign owned. Sovereign Credit Ratings Opportunities for direct investment. The fastest growth is likely to come N/R S & P, Moody's, Fitch in the form of services for Western businesses such as accounting and Source: Rating agencies legal, as well as in industries already identified as priorities by the state, which include aviation, automotive, agriculture, construction, transport Major Holidays in 2015‐16 and logistics. The consumer sector, which already sees turnover of US$20 Oil Nationalization Day 19‐Mar bln each month, has considerable long‐term growth potential, albeit Norooz (Persian New Year) 20‐23‐Mar many Western brands face well entrenched clones (e.g. Mash Donalds). Islamic Republic Day 31‐Mar Sanctions hold back economy. Iran produces annual results based on a Nature Day 1‐Apr financial year that concludes at the end of March. GDP may grow 2% in Khomenei's Death Remembrance 3‐Jun the year to end‐March 2016 if sanctions are lifted on schedule and Eid‐e‐Fitr (end of Ramadan) 7‐Jul investment picks up. Tassoua & Ashura 11‐12‐Oct Birthday of Prophet Muhammed 17‐Dec Hawkish Central Bank. The Central Bank has adopted a very hawkish Source: TimeandDate.com stance on interest rates in an effort to control inflation. It has also allowed the rial to devalue in response to the weaker oil price and as part of efforts to create a more competitive economy. Chris Weafer +7 916 349 2039 Tom Adshead +7 916 510 3753 Anastasia Obukhova contributed to this report. cjw@macro‐advisory.com tga@macro‐advisory.com http://macro‐advisory.com/ http://macro‐advisory.com/ No warranties, promises, and/or representations of any kind, expressed or implied are given as to the nature, standard, accuracy, or likewise of the information provided in this material nor to the suitability or otherwise of the information to your particular circumstances. Macro‐Advisory Limited does not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the content contained in this note. © Copyright Macro‐Advisory Limited Iran Country Profile Summary Removal of sanctions will unlock investment potential and boost economic recovery. The signing of the Joint Comprehensive Action Plan between Iran and the P5+1 group in July 2015 concluded 18 months of negotiations. This will allow Iran to develop its nuclear industry in a way that satisfies Western powers, and in return the West will unlock the sanctions imposed on Iran. The sanctions regime was loosened as the negotiations progressed, and brought modest GDP growth of 1.5% YoY in 2014 driven by a recovery in crude oil production and oil export growth, and, more importantly, a recovery in industrial production. Oil exports can rise quickly. Although the sanctions are not yet lifted formally, foreign companies are already showing interest in the Iranian market, especially in the oil and gas sectors and the prospect of Iranian gas shipments to Europe. Iran is expected to relatively quickly restore up to 0.3‐0.5 mbd of oil production, and, add approximately 200,000 bbl per day from the estimated 30 million barrels of oil the country has in storage, thus exports of 0.5‐0.7 mbd can be quickly achieved. Iran currently produces 2.85 mbd of crude. Gas exports will be slower and more expensive to realize. Iran clearly has the potential to be a major gas exporter – it sits on reserves almost equal to those of Russia – however, the timeline to become a significant exporter of gas, and to challenge Russia in the EU gas market, is expected to take a minimum of five years and, probably, closer to 10. Iran recently agreed a deal with neighboring Turkmenistan to boost gas and electricity imports in order to have sufficient energy to support the government’s economic recovery plans. SWIFT exclusion and oil embargo are the key sanctions. Sanctions were the key instrument of influence over Iranian politics after Mahmoud Ahmadinejad came to power in 2005. A large number of countries gradually started imposing sanctions against Iran. The most damaging sanctions were those imposed by the US and the EU, prohibiting purchases of Iranian oil and cutting off the Iranian banking system from SWIFT. Oil export revenues had accounted for about 50% of government revenues before the sanctions were imposed. The sanctions led to the rial losing two‐thirds of its value, from 10,000 against the US dollar in 2011 to almost 30,000 currently. The oil price collapse also contributed to the rial weakness, but more than half the decline pre‐dated the oil price move. Iran is also hoping to have restrictions lifted on foreign companies operating in the energy sector and in transportation services. Significant investment opportunities. Lifting the sanctions regime will open up one of the biggest economies in the region – and a population of close to 80 million – with considerable long‐term potential. Apart from the oil and gas industries the other areas which have been identified as offering significant potential for foreign strategic investors include: Automotive: The biggest automotive market in the Middle East, currently – according to officially published data – accounting for 10% of Iranian GDP (taking the whole supply chain into account). The main opportunities will be in the import of luxury brands and SUVs, as well as spare parts, and also in JVs with domestic manufacturers. Aviation: The current fleet of aircraft, both passenger and cargo, is very old. It is estimated that the country’s passenger and cargo airline operators will need to buy 300‐500 new aircraft over the first five years of a sanctions‐free economy. Agriculture: The government is expected to prioritize import substitution programs in order to boost the sector, which already accounts for 20% of GDP, and to create jobs in the food sector. There will be opportunities across‐the‐board for foreign investors in the agriculture sector, including food production. Opportunities are also expected in the supply and distribution chain, including refrigeration, logistics centers, truck sales, etc. 2 Iran Country Profile Consumer: Iran has the potential to become the biggest consumer market in the region. The main threat and barrier for foreign brands is the large number of clones which operate in the retail and IT segments. They will be hard to dislodge. While Iranian consumers may be inclined to buy genuine products, i.e. as and when their incomes rise, this may be limited if those behind the clone market succeed in blocking those imports. That said, the retail market is currently worth US$150 bln annually, and total consumer spend is conservatively estimated at US$20 bln per month. Communications: The communications market is dominated by state and other insider companies. The main potential for foreign investors is expected to be in equipment upgrades and in the supply of smart phones.
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