Iran: Risk Assessment
Country Risk Rating
Business Climate Rating
- Second largest proven oil and gas reserves in the world
- Large population with a vast consumer base
- Low level of external debt
- Strategic geopolitical location
- Tightening US sanctions
- Increasing domestic debt
- Weak infrastructure, old manufacturing equipment
- Very fragile banking sector with limited credit sources
- Declining oil revenues further threatening fiscal balances
- Increasing tensions with the US and other regional forces
US sanctions push economy into recession
Following the unilateral withdrawal of the US from the 2015 Joint Comprehensive Plan of Action nuclear deal in May 2018, the deterioration of the economic conditions in Iran continues. GDP growth is expected to contract further in 2020, mainly due to the re-imposition of US sanctions on key Iranian sectors such as banking, transportation and energy. The US decision taken on May 2, 2019 to end US sanctions waivers for importers of Iranian oil will continue to be a drag on the country’s key export revenues. The weak support from the European parties to maintain the deal, as they shy away from US sanctions as well, indicates that investment inflows into Iran will continue to suffer despite the business opportunities offered by Iran, one of the Middle East’s largest markets. As the re-imposition of the sanctions and lower investments will drag down on capital inflows towards the country, the rial would depreciate further. As a result, inflation is expected to remain high and purchasing power of households will continue to erode, weighing on private consumption that accounts for nearly half of GDP. Because lower export revenues would restrain the government’s ability to increase its spending to support non-oil activity, unemployment would remain high, representing another drag on consumption.
Budget deficit to widen to a several-year high, hit by a fall in oil exports
As nearly 50% of export revenues were tied to oil exports, the US administration’s decision to end US sanctions waivers for Iranian oil has caused a sharp decline in fiscal revenues of the government. Oil exports are expected to average around 400,000 barrel per day (b/d) in 2020 (compared with an average of 1.3 mn b/d under sanctions with waivers) on the back of the US’ renewed pressure to intensify its efforts to cut Iran’s oil exports to zero. In February 2019, the parliament has approved a budget plan with a projection of 1.5 million b/d of oil exports. Lower oil prices due to the global economic slowdown cause another challenge for export revenues. With no access to international financial markets, the government has started to rely on domestic borrowing in order to finance the budget deficit. With the low level of public debt, the government has enough room to proceed. Yet, an increasingly high level of domestic borrowing would risk productive investments through the crowding out effect. The government seems to prefer tapping domestic debt markets rather than introducing unpopular fiscal austerity measures.
Increasing tensions with the US threaten regional balance
The United States withdrew from the 2015 Iran nuclear deal on the grounds that it did not deal with missiles and Iranian interventionism in the region. After the re-imposition of the US sanctions and the Trump Administration’s announcement that new sanctions will be introduced, Iran said it wanted to export a minimum of 700,000 b/d of oil and go up to 1.5 million b/d if the West wanted to negotiate and save the nuclear deal. In retaliation to the sanctions, Iran announced that it had enriched uranium beyond the key limit imposed in the deal, and would reduce its commitments to the pact. The International Atomic Energy Agency (IAEA) confirmed that Iran had breached the 3.67% enrichment limit. The restart of nuclear activities may result in a confrontation between the EU and Iran, and reduce the political support of China and Russia to Iran. Furthermore, after attacks on oil tankers in the Strait of Hormuz in May-June 2019, coordinated drone strikes in September on the world’s largest oil processing plant in Abqaiq (Saudi Arabia) and on the oil field of Khurais exploited by Saudi Aramco, then the attack at the end of December of the American embassy in Baghdad by Shiite militias supported by Iran, followed by the elimination of the commander in chief of the Revolutionary Guards in charge of Iranian external operations by an American drone in Bagdad airport, the risk of escalating tensions between the United States, its allies and Iran has increased.