Iran’s Winding After Punishment Windfall
The main Tehran stock exchange index was up 5 percent in the latest quarter with a marginally stronger currency as international businesses and organizations began to probe post-sanctions asset and economic relief, despite the close anti-nuclear weapons treaty vote expected in the US Congress. The World Bank in a report predicted an immediate “windfall” equivalent to 3 percent of GDP with banking, insurance and trade and investment opening as over $15 billion in lost oil exports the past two years is recovered. It presumes an output return to one million barrels/day will lower global oil prices by ten dollar in 2016. Commerce will resume most with Asian and Middle Eastern partners as well as the UK and recession will definitively end as one-third of $100 billion in frozen accounts is released in the first phase. FDI could double to $3 billion from the current level chiefly in the hydrocarbons sector, as officials put end-decade needs at $150 billion to sustain capacity. India, China and Russia should lead the company pack but American and European multinationals could join and move into autos, manufacturing and pharmaceuticals as well, the Bank believes. The economy’s size is the same as in 2009 and unemployment is 15 percent, but inflation has halved to 15 percent. Medium-term growth should reach 5 percent and car production could recapture pre-sanctions strength. European drug sales at $2.5 billion in 2012 could restart but the 1 million new jobs required annually to absorb demand are unlikely. Real exchange rate appreciation could hurt agriculture and industry and encourage services shift. Non-oil exports have been supported the past decade with government subsidies which can no longer be afforded for petrochemicals, plastics and feed in light of competing infrastructure, education and training imperatives. The Bank urges a break from the past pattern of sudden booms when consumption and showcase project spending were priorities, and governance and transparency transition to a well-managed sovereign wealth fund in contrast with recent practice.
The Energy Ministry is redrafting contracts to allow more royalty flexibility and for possible equity stakes in local companies, but Chinese and Indian state producers may be the first to expand relations, especially with Western counterparts’ difficulties in securing trade finance from banks under strict money-laundering and anti-terror rules where violations have brought multi-billion dollar fines. Standard Chartered still has a local license, but was recently hit with a $1 billion penalty and is struggling to rebuild its emerging market franchise and top management. Russian institutions not subject to the same due diligence to avoid Revolutionary Guard ties often disguised through holding groups may also readily engage and London investment house Renaissance Capital with Moscow owners has touted early stock market ideas.
Listed banks had total net income of almost $2 billion but reported their toughest year in recent history during July’s annual meetings period. High interest rates with the benchmark at 20 percent and stiff competition for creditworthy customers have hurt the bottom line as the central bank cracks down on non-banking activities as an alternative outlet. However the industry could soon diversify again internationally and the biggest banks all paid dividends as the Vienna one is added.
