Iranian Macroeconomic Outlook
1. Iranian Overview
Iran, as the third largest economy in the Middle East and with a population of over 79 million, is poised to re-enter the international fold as a potential lucrative market for international investment and business. Depleted by international sanctions, Iran holds all the ingredients for a flourishing and commercial diverse economy and located in the Persian Gulf, it is a gateway from east to west. Despite the sanctions imposed over the past few decades, Iran is a middle-income economy with a literate, well-educated, and youthful population. The economy has avoided a dependence on hydrocarbons and has a diverse industry, including – but not limited to – automobiles, manufacturing, mining, financial services and banking. Latest estimates value the economy at US$ 397bn, which demonstrates the brilliant potential for the country despite the extremely difficult surroundings.
The Iranian economy, with the second largest population in the MENA region, has an estimated GDP of $417bn, expected to grow over 4% on average over the coming five years. The country has avoided the ‘Dutch Disease’ and has a well-diversified economy. Hydrocarbon export accounts for only 40% of total exports. Iran is one of the largest car producers in the Middle-East and is also a major producer in cement, steel, petrochemicals, agriculture and mining. Hydrocarbons reserves are the largest in the world, with over 157 billion barrels of proven oil reserves and 34 trillion cubic meters of natural gas. Extraction costs of hydrocarbons are extremely low $10-15 per barrel and Iran is the only nation with access to both the Persian Gulf and Caspian Sea Hydrocarbons basins. The government have substantial plans to renovate and develop a variety of the antiquated oil and gas fields, with the hopes of increasing production. Although, the oil price has affected the economy, other key sectors have benefited, particularly construction and manufacturing. Over 62% of GDP is driven by the service and industry sector.
The public sector represents the largest section of Iran’s economy. The government has implemented various ambitious reforms to empower the private sector through a 20-year vision document and Iran’s fifth five-year development plan. Iran has actively been privatising assets over the past few decades, a total of US$ 119bn since 2006, including 15 of the largest 30 companies. A vast number of IPOs have also occurred, aiming to shift the economy into a market-friendly model with greater private ownership. Iran has also undertaken a reform program intended to reduce inflation, expand the labour market and increase trade through fiscal reform and monetary discipline.
3. Banking & Financial Services
The banking system in Iran is the largest Islamic Financial system in the world. The sector has deepened extensively over the past decade through the licensing of private banks. Private banks are well capitalised with the largest commercial banks privatised in 2008. The largest banks in the market are all listed and actively traded on the stock exchange. The strong performance of these stocks heightened by the regular dividend payments and strong government backing. The Central Bank of Iran is independent with strong regulatory powers. The country has very low levels of debt with net debt, 3.4% of GDP, whilst Central Bank reserves are strong at $75bn.
4. Capital Markets
The Tehran Stock Exchange, with a market cap of US$ 100bn, is the fifth largest exchange in the Middle East. The softening of sanctions has allowed the country to compete for investor attention with the market open to direct foreign ownership. There are around 30 sectors listed on the exchange with over 295 listed companies.
The market has risen by 20% since the lifting of sanctions with a dividend yield of 13% and a price to earnings ratio of 5.5 times, offering attractive investment opportunities. Iran’s capital markets have become a feasible mechanism for finance within the wider economy. Mutual funds are gaining interest as a viable way to promote secondary market activity whilst a variety of funds are gradually entering the market. An index-linked ETF for foreign investors already exists and capital markets will become ever present in mobilising capital for financing of the country.