Our next newsletter (Issue 70) will be published in June 2017.
Published April 2017
In this issue:
- President Rouhani’s landslide win in the 19 May Presidential election made a clear statement: the people of Iran want to open up and reengage with the world.
- A demanding public will not wait forever for economic results, but Rouhani must prioritize achieving meaningful and sustainable long-term growth and employment. There is no quick fix for stubbornly high unemployment. It requires structural reforms that will facilitate a greater role for small and medium sized enterprises and foreign investment.
- A lack of access to international finance clearly remains a significant obstacle for private firms; but one that can be overcome. The government must press ahead with banking reforms and build faith in its financial system overseas, bringing Iranian banks up to international standards.
- The electorate gave Mr Rouhani a powerful mandate to clean up Iran’s business environment, root out corruption and thus open the economy up to effective international interaction. A striking 57% of Iranians think corruption has gotten worse in the last five years.
- The President found great support for his plans for faster and more effective privatization, which will bring more opportunities for entrepreneurs and a fairer business environment. This means reducing the role of the IRGC and state entities in the economy and can be achieved by structural reforms, regulatory changes and enforcing the rule of law.
- Rouhani needs to place business at the heart of his agenda. This means cutting the fat in government spending and reconsidering expensive military adventures. The Syrian conflict alone has cost the Iranian tax payer close to $6bn in loans, which may not be repaid and for which any benefits will accrue to well-connected IRGC players, not ordinary firms.
- On the 19th May, the Iranian people will cast their votes in the Islamic Republic’s 12th Presidential election.
- The successful candidate must move quickly on a number of vital, structural economic reforms. Stubbornly high levels of unemployment cannot stagnate for four more years. The solution lies in the private sector.
- Three decades of poorly managed privatisation policy have created an unbalanced and non-transparent business environment in Iran. A general lack of faith in the rule of law and the independence of the judiciary have kept out foreign investors. This has to change.
- The domineering presence of the state in Iran’s economy has a directly negative impact on business dealings. Foreign investors see blurred lines as to who they can and cannot deal with and the state presence suffocates private enterprise.
- Considering the field of available candidates on the 19th May, the international business community would endorse a second term for President Rouhani who has stated clearly that preserving the JCPOA and building on Iran’s position as a fully functional member of the international trading and financial system is a priority.
- If he wins a second term, Mr Rouhani would have to do more to tackle unemployment and boost the role of the private sector. As the candidate positioning himself as the enemy of corruption on the campaign trail, if he can successfully separate the functions of the state and military from the economy he will unlock the jobs and growth the Iranian electorate sorely needs.
- When President Rouhani makes his pitch to the Iranian electorate for a second term in office, he will be judged not just on his striking of the JCPOA deal, but also his administration’s ability to capitalise on it: on the latter his scorecard is mixed. Mr Rouhani has delivered a “return to tranquillity” with solid economic policy making and a return to international oil markets, but the gains are not widespread and unemployment is very high.
- Mr Rouhani promised to flush corruption out of Iranian institutions and privatise the Iranian economy: his failure on this account creates a strong feedback loop into the underperforming economy. The lack of reform will continue to hold back government ambitions for productivity improvements.
- More often than not it is the state-owned sector which is the international face of Iranian enterprise and this acts as a drag on foreign investment. It is inefficient, delays productive reform, attracts corruption and makes foreign companies nervous about sanctions exposure. Foreign investors want to see a healthy, thriving private sector in Iran and if they see that, they will invest in it.
- In President Rouhani’s Norwuz address, he referred to the “pathway” he has laid out for the Iranian economy and argued for patience with long-term policies to make it a success. This is true to a large extent, and if in the next four years involves genuine reform in the state-sector and banking, it could begin to bear fruit.
- In other developments, Russia and Iran have been in talks over a 100kbpd oil supply agreement and development partnerships for 11 Iranian fields worth over $20bn. Russia and China’s economic influence in Iran is growing from strength to strength: China now accounts for 36% of Iran’s exports, compared to only 12% ten years ago.
- Iranian Ballistic missile tests have sparked international controversy, leading to an urgent UN Security Council meeting and a set of targeted sanctions from the US.
- The Iranian reaction to the new sanctions, which they regard as breaching the spirit of the JCPOA, has been relatively sanguine with no further escalation at this stage.
- Iranian business leaders are accustomed to taking the long-view on US relations and foreign investments. Every US president over the last 40 years has imposed sanctions on Iran and the new administration has not yet strayed far from the historical trend. Businesses feel Iran's economic prospects will depend on its ability to convince the rest of the world it is adhering to the JCPOA and open for business.
- Iran's 6th five-year development plan was released last month, based on a highly ambitious projected inflow of $22bn per year of foreign direct investment. A breakdown of the origin of Iran's inward investment flows reveals the importance of the non-US members of the P5+1, who negotiated the JCPOA with Iran, to realising those targets.
- The Tehran stock exchange registered significant losses in January but this is not ostensibly driven by rising tensions with the US. Meanwhile the rial has strengthened over the past month, following a dramatic deterioration in November and December.
- Central Bank Governor Seif warned that the enormous, and rising, share of bad loans in the banking system continues to pose a substantial macroeconomic risk.
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