Iran: Risk Assessment
Country Risk Rating
Business Climate Rating
- Second largest proven oil and gas reserves in the world
- Strategic geopolitical location
- Highly educated population
- Diversified economy, various investment opportunities as the manufacturing tissue is underdeveloped
- International sanctions weighing on production, finances, and trade volumes
- Weakness of the local currency and increasing inflation
- Fragile banking sector
- Rising regional and geopolitical tensions
A weak economy hit by COVID-19; easing of sanctions eyed
On top of the re-imposition of U.S. sanctions in the second half of 2018 and the fall in oil prices, the Iranian economy has been hit hard by the pandemic with over 570,000 confirmed cases and nearly 33,000 deaths as of October 2020. The services sector, most affected by the COVID-19 pandemic, accounts for around 60% of GDP, followed by mining (including oil and gas) and manufacturing. It is expected to remain weak despite its recovery from the March-May 2020 dip (when it shrank by -3.5% YoY in the first quarter of the 2020-2021 Persian calendar year), mainly because of rising COVID-19 cases, restrained tourism mobility, and high inflation (30.4% in September) that weighs on households’ real income. Lower capital inflows to the country due to sanctions and the persistent weakness of the rial (the toman, equivalent to 10 rials, weakened from 13,320 vs. USD at the beginning of the year, to 32,200 vs. USD as of mid-October 2020) are expected to fuel inflationary pressures. Domestic factors linked to the distortion in supply chains, credit allocation, and the multi-layered currency regime also fuel chronic inflation. Coupled with the sanctions, this will dampen investment and private consumption. Nevertheless, some stabilization in the economic conditions will be seen in 2021 on the back of an estimated decline in COVID-19 cases in the world. On the other hand, downside risks on growth will become significant in case of another lockdown following a resurgence of the pandemic in Iran or in its key export markets. This can also be the case if the international sanctions are not eased by the new U.S. administration. In these eventualities, economic activity and operating conditions would further deteriorate.
Easing of sanctions will be determinant to narrow the external gap, the budget deficit will widen because of COVID-19
Iran’s relations with the United States, after the election of Joe Biden as the new president in November 2020, will be determinant for the improvement in the economic conditions and the trend for Iran’s oil exports (nearly 40% of total exports). The Joint Comprehensive Plan of Action (JCPOA, known as “Iran Nuclear Deal”) was signed in July 2015 by Iran, the U.S., China, Russia, France, Germany, and the UK. Iran agreed to eliminate its uranium stockpile and to enrich uranium up to 3.67% for the next 15 years. In return, the U.S., EU and UN-related sanctions on Iran’s oil, manufacturing and banking sectors were to be lifted. However, in May 2018, the U.S. announced its withdrawal from JCPOA and re-introduced sanctions in November 2018. Iran’s crude and condensate exports averaged 440,000 barrels per day (bpd) and 204,000 bpd in March 2020, respectively. Oil exports are expected to remain below 500,000 bpd compared to nearly 2.8 million bpd in 2018 before the U.S. left the nuclear deal. On the other hand, Iranian authorities have been quoted saying that refined product exports have been less affected by sanctions. The country will also benefit from the increase in the daily processing capacity to 480,000 bpd in its Persian Gulf Star Refinery (PGSR). If the nuclear agreement becomes functional again, the U.S. sanctions on Iran will be eased, but this process would take time and be very gradual. Furthermore, easing of the international sanctions will not enable Iran to fully exploit all of its oil and gas capacity, due to the long-time underinvestment in those infrastructures and difficulties in the operational environment. Finally, international companies will tiptoe back to the Iranian market, as they would remain cautious given the past accident in the application of the current nuclear agreement. On the fiscal side, the authorities announced a package of nearly 10% of GDP to counter COVID-19 cases and support households and businesses. With the limited financial scope and a fiscal breakeven price estimated at USD 395 according to the IMF, the government will continue to opt for reserves depletion, domestic borrowing, and privatization to cover the gap. The part of Iran’s gross international reserves that are readily available is estimated at only around USD 10 billion. Consequently, privatizations and domestic borrowing seem to be two preferred options in 2021.
A US return to the nuclear deal?
After the previous U.S. President Donald Trump’s hawkish stance, the new President Joe Biden said the U.S. would join the nuclear deal if Iran returns to compliance with the agreement. Such a return to the deal would pave the way for the easing of sanctions on Iran, increase its trade volume with the rest of the world and encourage foreign direct investments into the country. However, a comeback to the deal may not be easy. Iranian authorities estimate the total loss of revenues related to the U.S. withdrawal from the deal at USD 150 billion. On the other hand, Iran will hold presidential elections in 2021. The political stance of the next President will also be important for the future of the Iran-U.S. relations.