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Iran Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

Iran will be one of the fastest growing economies in the region over the next five years as investment comes into the country following the removal of sanctions. Declining oil prices will force the government to cut current spending and investment in the country's infrastructure in 2017, which will result in slow expansion of private consumption and fixed investment. We expect the Iranian rial to remain steady over the coming quarters as depreciatory pressure have reduced following the 12% devaluation in August. President Rouhani will win re-election in presidential vote due in May 2017.

Table Of Contents

Iran Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Iran After Sanctions: Still Waiting For The Boom........................................................................................................................8
Even with the removal of most sanctions, remaining impediments to doing business in Iran will continue to restrict foreign investment
and prevent a boom in the economy. Economic growth will still be buoyant in 2016 and 2017 given rising oil production, but this is
already running out of steam. We do not expect an uptick in economic growth until mid-2017, as the legal framework becomes clearer.
GDP By Expenditure Outlook.................................................................................................................................. 10
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................11
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................11
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................11
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................12
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................12
Monetary Policy........................................................................................................................................................ 12
Jump In Inflation Before Heading Lower.....................................................................................................................................12
CPI Inflation in Iran will head higher following the 12% devaluation in the currency in August. After this one-off shock, we do not expect
any further significant devaluations, and, along lower input costs following sanctions removal, this will keep inflation in single digits in
coming quarters, and result in increasing popularity for Rouhani ahead of the May 2017 vote.
Monetary Policy Framework ................................................................................................................................... 14
TABLE: MONETARY POLICY.................................................................................................................................................................................13
Fiscal Policy And Public Debt Outlook.................................................................................................................. 14
Sustained, But Manageable Deficits............................................................................................................................................14
Iran will record a large rise in its fiscal deficit in 2016 as the impact of lower oil prices more than offsets gain in oil output and the positive
economic benefits of the nuclear deal. Fiscal deficits will reach around 4.0% of GDP in 2016 and 2017, but given access to unfrozen
assets, and foreign reserves, this is more than manageable.
Structural Fiscal Position........................................................................................................................................ 15
TABLE: FISCAL POLICY.........................................................................................................................................................................................15
Currency Forecast.................................................................................................................................................... 15
IRR - Depreciation Now Over.......................................................................................................................................................15
The rial is in the midst of a period of relative stability following the unification of exchange rates. This contrasts starkly with the rapid
depreciation seen in the past five years as the nuclear deal, much lower inflation and an improving economy mitigate some of the forces
to the downside.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................16
Chapter 2: 10-Year Forecast................................................................................................................... 17
The Iranian Economy To 2025................................................................................................................................. 17
Range Of Problems To Mitigate Impact Of Nuclear Deal...........................................................................................................17
The deal over Iran's nuclear programme will bolster the country's economic growth prospects. However, the inability to fully exploit Iran's
enormous oil and gas wealth and a challenging operational environment will lead to slow economic growth over the next 10 years.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................17
Chapter 3: Political Outlook................................................................................................................... 19
SWOT Analysis......................................................................................................................................................... 19
BMI Political Risk Index........................................................................................................................................... 19
Domestic Politics..................................................................................................................................................... 20
The Next Supreme Leader: Assessing Potential Successors..................................................................................................20
Iran's next supreme leader will have enormous influence over the country's economic and political future. Hardline candidates have
the greatest sway within the political establishment at present, and Ayatollah Mahmoud Hashemi Shahroudi is best placed to succeed
Ayatollah Kh a menei. This could herald a more anti-Western foreign policy stance and also greater domestic instability, as a power
struggle is likely.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................20
TABLE: POSSIBLE SUCCESSORS TO SUPREME LEADER................................................................................................................................21
Long-Term Political Outlook................................................................................................................................... 22
Hardliners To Maintain Control, But Power Struggle Likely.....................................................................................................22
Iran's hardliners will retain their hold on power over the coming decade, although moderates will continue to push for greater political
and social liberalisation. Even if the relatively moderate President Hassan Rouhani wins re-election in 2017, the main institutions of
power, namely the supreme leader, Assembly of Experts, and Revolutionary Guards, will remain under conservative control. Economic
necessity dictated a nuclear deal between Iran and the West in 2015, but risks to the deal collapsing will rise over the coming years,
especially if a hardliner is elected president in 2017 or is selected as the next supreme leader after Ayatollah Ali Khamenei.
Chapter 4: Operational Risk................................................................................................................... 27
SWOT Analysis......................................................................................................................................................... 27
Operational Risk Index............................................................................................................................................ 27
Operational Risk....................................................................................................................................................... 28
TABLE: OPERATIONAL RISK.................................................................................................................................................................................28
Business Crime ....................................................................................................................................................... 29
TABLE: BUSINESS RESPONSE TO RISK.............................................................................................................................................................30
Government Intervention ........................................................................................................................................ 33
TABLE: BUSINESS TAXES..................................................................................................................................................................................... 34
TABLE: PERSONAL INCOME TAX.........................................................................................................................................................................35
Chapter 5: BMI Global Macro Outlook................................................................................................... 39
Global Macro Outlook.............................................................................................................................................. 39
Broad Recovery But Three Notes Of Caution.............................................................................................................................39
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %.................................................................................................................................... 40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %................................................................................................................................... 41
TABLE: MACROECONOMIC DATA and FORECASTS.............................................................................................................................................. 43

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