Iran - Economic Overview and Infrastructure Projects November 2016 UAE | Libya | Bulgaria | USA www.whisperingbell.com Iran - Economic Overview and Infrastructure Projects November 2016 Table of Contents IRAN’S CURRENT ECONOMIC SITUATION ............................................................................................................................... 3 KEY INFRASTRUCTURE PROJECTS IN IRAN: .......................................................................................................................... 4 ABOUT WHISPERING BELL ........................................................................................................................................................ 10 Page | 2 Whispering Bell MEA DMCC, PO Box 487151, Dubai, United Arab Emirates. Tel: +9714 448 6690 www.whisperingbell.com Iran - Economic Overview and Infrastructure Projects November 2016 Iran’s Current Economic Situation The World Bank’s latest MENA Economic Monitor Report, expects Iran’s growth to rise to 4.2 % and 4.6 % in 2016 and 2017, as a result of the lifting of the sanctions and a more business-oriented environment. The lifting of nuclear-related sanctions in January 2016 and the strong electoral wins from moderates and reformers in Parliament and Assembly of Experts helped strengthen the hand of the reform-oriented administration of President Hassan Rouhani. The Joint Comprehensive Plan of Action (JCPOA) between Iran and the P5+1 (United States, United Kingdom, France, Russia, China and Germany), laying out the plan for lifting of sanctions on Iran, was signed in July 2015. As a result, as Iran reached Implementation Day on January 16, 2016, materially all nuclear-related sanctions were lifted. Meanwhile, the February 2016 elections for Parliament and the Assembly of Experts (whose main task is the selection of the Supreme Leader), moderates and reformers saw major gains as prominent conservatives lost ground. These developments, along with a reform-minded government provide a favorable environment for economic reforms. In addition, the context of a new five-year development plan starting March 21, 2016, which targets a rate of annual real GDP growth of 8 %, provides for an optimistic business environment. Key Economic Indicators 2014 2015e 2016f 2017f Real GDP growth (%) 3.0% 0.5% 4.2% 4.6% Inflation (%) 15.6% 14.2% 13.1% 11.6% Current account (% GDP) 3.8% 0.6% -0.4% 1.2% Fiscal balance (% GDP) -1.2% -2.7% -1.8% -1.0% Source: The World Bank Following a severe sanctions-related recession in 2012 and 2013, real GDP increased by 3 % in 2014, driven by the rise in consumer and business confidence supported by the partial lifting of sanctions under the interim Joint Plan of Action (JPOA) between Iran and the P5+1 in November 2013. The dynamism created by the interim JPOA led to an economic recovery in 2014, but this recovery experienced a pause in 2015 as uncertainty regarding the timing of the lifting of sanctions under the JCPOA undercut initial progress. Consequently, in 2015, the Iranian economy is estimated to have advanced at a growth rate of 0.5%. Inflation is expected to continue to abate with less expansionary monetary policy, as the Consumer Price Index fell to a 12.6 % annual rate in January 2016, from a peak of 45.1 % in October 2012. Yet, the pace of job creation has remained weak and the unemployment rate rose to 11.7 % in 2015, up from 10.6 % in 2014. The fiscal deficit also widened due to low oil prices, from 1.2 % of GDP in 2014 to 2.7 % of GDP in 2015. Page | 3 Whispering Bell MEA DMCC, PO Box 487151, Dubai, United Arab Emirates. Tel: +9714 448 6690 www.whisperingbell.com Iran - Economic Overview and Infrastructure Projects November 2016 Similarly, the current account surplus is estimated to have dropped from 3.8 % of GDP in 2014 to 0.6 % of GDP in 2015. The lifting of the sanctions and a more business-oriented environment are projected to increase real GDP growth to 4.2 % and 4.6 % in 2016 and 2017, with economic indicators generally positive. On the production side, growth will be mainly driven by higher hydrocarbon production and prospects of a recovery in the oil price. On the expenditure side, consumption, investment and exports are expected to be the main drivers. Inflation is forecast to remain moderate by Iranian standards. The lifting of sanctions, especially the positive impact they will have on the banking system, will significantly reduce international transaction costs. Strong capital inflows, including Foreign Direct Investment and repatriation of the frozen assets, could put upward pressure on the Iranian rial, which will help contain imported inflation. The fiscal deficit is projected to narrow to 1.8 and 1 % in 2016 and 2017, respectively, mostly on account of improved oil revenues. The current account balance is projected to turn into a surplus in 2017, also primarily driven by rising oil exports. Risks to the outlook include lower oil prices, slower global growth, and the possibility that the country risk remains high because of the uncertainty that non-nuclear-related sanctions create for foreign businesses. A key challenge relates to the prospect of undertaking structural reforms that can move the country toward the sustained and inclusive growth envisaged in its sixth five-year plan. Finally, the risk remains that the incoming Trump administration remains hostile to Iran and attempts to backtrack on the JCPOA. Key Infrastructure Projects in Iran: In this section, we summarize several different project areas in Iran, especially the gas, petrochemicals, power, transportation, water and wastewater, We look at these areas of the infrastructure business, not only new projects but existing ones, as some of the existing projects may offer subcontracting or partnership opportunities. Iran petrochemical investment activity: The Iranian petrochemical industry is expected to grow significantly in the next decade. Sanctions relief, increased foreign direct investment and government plans to promote the petrochemical sector should result in sector-wide growth. Nevertheless, Iran is desperate for foreign investment and such investment is critical for the long-term sustainability of the petrochemical sector. Iran has ambitions to increase petrochemical production to 180 million tonnes in 10 years and hopes to become the regional leader in petrochemical production. Investments in methanol, ethylene, polyethylene, olefins, ammonia and urea will drive petrochemical growth in the coming years. More than 67 petrochemical projects are Page | 4 Whispering Bell MEA DMCC, PO Box 487151, Dubai, United Arab Emirates. Tel: +9714 448 6690 www.whisperingbell.com Iran - Economic Overview and Infrastructure Projects November 2016 now under construction. The completion of the West Ethylene Pipeline, the Olefins 11 and 12 Projects and the Kaveh Mega Methanol Project suggest that the Iranian petrochemical industry is poised for continued growth. The Research Center of the Parliament (Majlis) of the Islamic Republic of Iran has predicted that petrochemical output of the country will show a growth of 7.8% this fiscal year (ended March 20, 2017). Based on statistics released by the National Petrochemical Company (NPC) of Iran, the petrochemical output last year and in the first 4 months of this year were 46.4mn tons and 17mn tons respectively. It predicted that the output will reach 50 million tons by end of the current year. The petrochemical industry had delivered 15.5% growth in the past three years and 7% last year. Petrochemical exports have grown 46% over the past three years and 12% last year as petrochemical projects have come online the past few years. NPC, which through its subsidiaries operates several downstream complexes, is aiming to complete 55 unfinished petrochemical projects. Of these, 15 are currently operational, and 40 will need an investment of EUR 20-22mn for completion by the next five years. Seven petrochemical projects added about four million tons to the petrochemical capacity at a cost of about 2,200 million euros. These include Takhtjamshid facility of Mahshar, Lorestan petrochemical facility, the sulfuric acid project in Orumieh, the phase two of Kavian petrochemical facility, the ammonia project in Marvdasht, the glycol ethylene Morvarid project and Mahabad petrochemical project. By end of this year, 7 more projects will be completed and put into operation including phase one and two of West Ethylene Pipeline, phase two of Karoon Petrochemical facility, Kordestan polyethylene, phase three of Pardis petrochemical facility, Entekhab petrochemical facility, Takhtjamshid Pars Asaluyeh petrochemical facility and Dalahu petrochemical facility. Over the next 10 years, 28 new projects with an estimated value of 30 billion euros are planned; they all require foreign investment. To this end, the NPC’s policy is to encourage foreign companies to enter the market. Negotiations are underway with several foreign companies over their plans for purchasing our petrochemical products as well as their cooperation in [developing] the industry. Petrochemical projects will be developed via both domestic and foreign investments," he said, urging internationals to register their company in Tehran or choose Iranian partners to facilitate operations. On April 2016, Marzieh Shahdaie, managing director of Iran's National Petrochemical Company (NPC) told local media that Iran is planning to start-up 14 petrochemical projects in the current Iranian year, which began on March 20. Once completed, the new projects