Iran “fiscally and structurally well placed” for comeback

Iran has significant economic growth potential, and structural reforms have helped strengthen its fiscal foundation, Moody’s Investors Service said in a special report, “Sovereign Credit Profile Set to Improve in Aftermath of Sanctions.”

“Sanctions relief will grant Iran access to an estimated $150 bln in frozen foreign assets. We project the resulting implementation of investment plans, as well as a recovery in oil production, to contribute to higher GDP growth of 5% in 2016-17,” said Atsi Sheth, an Associate Managing Director at Moody’s.

Unrated Iran’s $417 bln economy, the second largest in the Middle East after Saudi Arabia (rated Aa3 stable), is more diversified than other regional oil exporters. Nevertheless, Moody’s expects the removal of oil-related sanctions to result in an investment inflow, which will help revive the country’s ageing oil infrastructure. According to Iran’s Finance Minister, the country will need $90 bln annually in external financing to meet its 8% economic growth target.

“International sanctions meant that Iran had to adapt to the reality of lower oil revenues and implement structural reforms much earlier than other oil-exporters. Most other oil-dependent sovereigns are only just beginning to consider structural fiscal reform,” Sheth added.

Iran’s capital and financial accounts remain resilient to external shocks. Iran’s exposure to the capital flow volatility, which many emerging market economies are undergoing as a result of the US Fed interest rate hike, is negligible.

However, Iran’s key credit driver remains political, in particular whether it will continue to meet its obligations under the recent agreement, and whether other countries will continue to agree that it has done so.

Meanwhile, with the nuclear deal that led to the lifting of international sanctions, Iran suddenly has access to around 100 bln euros of its assets that were frozen in countries around the world.

And as of last week it is back in the global banking business, able to use the worldwide transaction networkSWIFT, the Belgian based cooperative which handles cash transfers and letters of credit between financial institutions, according to Euronews.

Mohsen Jalalpour, the head of Iran’s Chamber of Commerce, Industries, Mines and Agriculture, said: “Banks can now access SWIFT. We should note that our banks were subject to banking sanctions and needed to prepare the necessary infrastructure and they managed to do that by today.”

Re-engaging with the banking world through the Swift system is vital for Iran’s trade, particularly of crude oil.

While international banks are expected to link up with their Iranian counterparts via SWIFT, Iran will also be looking to encourage foreign institutions to expand involvement in the country’s financial system.

However, foreign banks considering establishing

a subsidiary in Iran will in most cases require a partnership with a local entity unless they set up in one of a handful of free zones, said Nicholas Gilani, senior partner at Arjan Capital, a consultancy advising on Iran business.

And for many foreign banks, there are concerns about being caught up in ongoing US sanctions.

Many international sanctions relating to Iran’s nuclear programme were lifted but most involving U.S. measures remain in place. Non-US banks may trade with Iran without fear of punishment in the United States, but U.S. banks may still not do so, directly or indirectly.

Washington’s sanctions prevent U.S. nationals, banks and insurers from trading with Iran and also prohibit any trades with Iran in U.S. dollars from being processed via the U.S. financial system. This is a significant complication given the dollar’s role as the world’s main business currency.

European banks are also cautious – with some, including Deutsche Bank, remembering past fines from US regulators for breaking sanctions, though Commerzbank has said it is reviewing its policy of not doing business in Iran.

An Iranian central bank official said banks from European countries including Germany, France, Britain and Italy, had been in talks to open branches after the lifting of sanctions.

“God willing, soon we will witness that too. Iran is a very attractive market for business and they know that,” the official said.