Iran: World’s Largest Untapped Frontier Market Iran: World's Largest Untapped Frontier Market IRAN IN BRIEF Population 78.4 million (2nd Stock exchange $100bn largest after Egypt) (Tehran) Area 1,648,195 sq km (2nd No of listed 314 largest in Middle East) companies GDP (2014, $404bn ($401bn of Literacy (10-49 97% current price) UAE) ages) GDP (2014, PPP) $1,334bn ($1.508bn Young population 60% under 30 years of Turkey) old GDP per capita $17,114 ($16,100 of Major industries: Manufacturing & (PPP) Brazil) mining, oil & gas, services, agriculture Crude oil reserves 4th world‘s largest Key exports Crude oil, petroleum products Natural gas 1st world‘s largest Gross official $110bn reserves reserves Crude oil 2nd largest in OPEC External debt 1.8% of GDP production 2 Iran: World's Largest Untapped Frontier Market CONTENTS Iran in Brief 2 Iran in Numbers 6 Summary 8 Recent Key Developments At a Glance 9 Economy 11 GDP and Oil Exports 11 Foreign Investments: Inviting Global Oil Majors 14 Inflation and Exchange Rate 16 Government Finances 18 Economic Outlook 20 Key Macroeconomic Indicators 22 Politics 23 Political System 23 Presidential Elections 24 Nuclear Program 25 Comprehensive Nuclear Deal 27 Framework Nuclear Deal 28 Landmark Interim Agreement 29 International Sanctions on Iran 30 Key Industry Focus 33 Oil & Gas 33 Mining and Manufacturing 36 Banking and Financial Services 39 Power 41 Transport and Aviation 43 Telecom 45 Retail Market 47 Pharma and Health Care 49 Education 52 Tourism and Hospitality 55 Digital Economy 58 Opportunities Across Asset Classes 60 Public Equities 60 Private Equity 64 Real Estate 65 Annex I. ECONOMIC AND INDUSTRY INDICATORS 67 Key Macroeconomic Indicators 67 GDP Performance, 2005-2014 67 GDP Projections, 2014, 2020 and 2030 ($bn, current prices) 67 Population and Income ranking, 2014 68 GDP Growth Projections, 2015-2020, 2025, 2030 ($bn, current) 68 Exports, incl. Crude Oil and Petroleum Products, 2010-2014 68 Geographic Destinations of Crude Oil Exports, 2010-2014 (‗000 bpd) 68 Monetary indicators (end of period, trln. Rials) 69 Exchange rate (IRR/$) 69 Government budget (trln. Rials) 69 Tax revenue (trln. Rials) 69 Oil & Gas Sector Indicators 69 Mineral Resources, Reserves, % of World 69 World‘s Top Iron Producers, 2013-2014 70 3 Iran: World's Largest Untapped Frontier Market Composition of Iran Manufacturing, 2011 70 Iran Manufacturing 70 Iranian Mining and Manufacturing Contribution to GDP (at current prices), IRR bn 70 Production of Electricity (Bn Kw/h) 71 Access to electricity, % of rural population, 2012 71 Access to electricity, % of urban population, 2012 71 Subscribers to Telecom Services in 2012 and 2015, mn 71 Internet Penetration, % Population in MENA countries, 2014 71 Tourist Arrivals 71 Average age of selected Iranian and international airline fleets in 2015 72 Life expectancy at birth in Iran, total 72 Health Expenditure in Iran 72 Gross intake rate in pre-primary education 72 Net Intake rate in the first grade of primary education 72 Top-10 Domestic Production Pharmaceutical Companies (2009-2010) 73 Annex II. Tse-30 Listed Companies Profiles 74 2020 Insights Profile 75 4 Iran: World's Largest Untapped Frontier Market IRAN IN NUMBERS Real GDP Growth Exports Source: IMF WEO Apr.2015, 2020Insights estimates (years are financial) Source: US EIA, OPEC 2015 Population (million) Inflation (end of period, %) Source: IMF WEO 2015 Source: Central Bank of Iran Top 10 Proven Oil Reserves (bn barrels) Top-10 Proven Natural Gas Reserve (% of world’s total) Source: International Energy Agency, The Oil and Gas Journal, January 2015 Source: BP 2015 5 Iran: World's Largest Untapped Frontier Market GDP per capita (PPP, $, 2014) Access to electricity (% of urban population, 2012) Source: IMF WEO 2015 Source: World Bank Internet Penetration (% population, 2014) International Tourist Arrivals Source: Internet World Stats Source: The World Bank, 2020Insights Top-20 Largest Economies Ranking 2020 ($bn, GDP) Top-20 Largest Economies Ranking 2030 ($bn, GDP) Source: IMF WEO 2015, 2020Insights estimates Source: IMF WEO 2015, PWC 2015, 2020Insights estimates 6 Iran: World's Largest Untapped Frontier Market SUMMARY Iran has emerged as the world‘s largest untapped frontier market after the second largest economy in the Middle East and North Africa (MENA) has achieved a breakthrough long-awaited nuclear deal with the world powers and is re-entering the global economy with no sanctions. After more than a year and a half of tough negotiations, Iran finally reached a deal with the world powers that may start a new era of relations with the West and rapid economic growth. Started with the historical phone call with US President Obama in September 2013, signing a landmark interim deal in November 2013, reaching a framework agreement in April 2015 and the much-anticipated comprehensive deal on July 14, 2015, now Iran is to benefit foreign trade and investments with no restrictions. Hit hard with sanctions, including in oil trading and foreign investments, Iran has now invited global energy firms to invest in its world class oil and gas reserves. As the slump in crude oil exports, the country‘s largest revenue earner, has eased 13% y-o-y in 2014 versus 39% y-o-y a year earlier due to the sanctions, Iran has experienced a sharp rebound with 3% positive GDP growth last year from contractions in the previous two years. Rapid increase in inflation and depreciation in exchange rate has also slowed down thanks to rebound in economic activities, exports and optimism in business environment. Although US$12bn sanction relief achieved so far under the interim nuclear pact reached in November 2013 helped somewhat weather the recession, expected upcoming positive developments are likely to bring turning points into the economic landscape of Iran. After certain sanctions have been eased, now Iran has the right to ship oil to some Asian countries, including China, India, Turkey, Japan, South Korea and Taiwan. Factoring in the said above, we estimate Iran‘s economy may experience a positive growth rate of 1.5% in 2015/16, assuming that expected increase in crude oil exports once the sanctions are removed and revival in public and private sector activities should support the economic acceleration. We view that given the recent warming in the country‘s relationships with the West, constructive approach to resolving concerns over its nuclear program and readiness to award large scale oil and gas contracts to global firms that would allow inflow of several multi-billion dollar foreign investments across industries, Iran has the potential to become the world‘s largest frontier market and one of the fastest growing economies globally in the coming years. Therefore, we believe early stage and forward-looking investors will start tapping this massive market as, albeit not without downside risks, it is set to offer probably the most unprecedented opportunities across different industries and asset classes in the medium and long terms. Iran‘s economy has strong potential to experience rapid growth in the coming decade and enter the league of top twenty largest economies by 2020 and to be among top ten in the world by 2030. 7 Iran: World's Largest Untapped Frontier Market RECENT KEY DEVELOPMENTS AT A GLANCE Historic Nuclear Deal reached with World Powers Iran and the world powers, including the US, the UK, Russia, Germany, France and China have reached a long-awaited deal in Vienna on July 14, 2015, putting an end to a 12-year standoff between the Islamic Republic and the West. After 18 days of uninterrupted marathon talks, the parties agreed that Iran will significantly limit its nuclear ability for more than a decade in exchange for removal of sanctions against it. As a result of the constructive diplomacy, the agreement is a historic milestone towards unprecedented US-Iran rapprochement after 37 years of hostilities. The UN, US and EU have committed to terminate sanctions related to activities related to financial, banking, insurance, oil and petrochemical products trade and investment, automotive, transactions in commercial passenger aircraft, shipping, shipbuilding and transport; gold and other precious metals, as well as delist a number of persons and companies/agencies that were subjected to asset freeze and visa ban. Economy jumped rapidly 3% y-o-y in 2014/15 on business confidence Iran experienced a strong economic growth rate of 3% in the financial year of 2014/15 after substantial contraction of 6.6% and 1.9% in the previous two years (IMF April 2015). An interim nuclear agreement reached in November 2013 with the world powers represented by the P5+1 group, including the five permanent UN Security Council members plus Germany, has boosted business confidence and allowed temporary ease of sanctions on crude oil exports, automobile sector and domestic and international bank transactions that supported the sharp positive economic growth. Crude exports fall slowed, thanks to Asian buyers Despite the fact that the sanctions require to keep the crude oil exports from Iran at 1mpbd, it reached 1.1mbpd in 2014 thanks to sales to China, India and Japan, still lower than 1.2mbpd in 2013. Oil exports started rising in November 2013 amid the breakthrough interim agreement with the world powers that requires freezing key parts of Iran‘s nuclear activities in return for about US$7bn worth temporary sanctions relief. Iran has lost about US$80bn in revenues due to the sanctions, as crude oil exports, which make up about 60% of the Iranian government budget, more than halved from pre-sanction level of 2.5mbpd in 2011 and lost estimated US$50bn in 2013. Iran needs US$200bn investment in oil & gas, invited global majors President Rouhani met with senior executives of over 30 companies, including some of the world‘s largest energy groups such as BP, Royal Dutch Shell, Total, ENI, Gazprom Neft and Petrobras at the World Economic Forum on January 23 this year in Davos.