Dubai: The economic implications of Iran’s nuclear deal with the world powers and the lifting of sanctions would be enormous for Iranian economy but it could take 12 to 18 months before the full impact on the economy could be felt, according to economists and analysts.
In the context of the deal, GDP growth could accelerate from around 3 per cent in fiscal year 2015-16 to 6 per cent in fiscal years 2016-17 and 2017–18, according to the Institute of International Finance (IIF).
Analysts said the deal has the potential to give a big boost to Iranian exports, private investments, narrowing of fiscal deficit and decline in the large spread between the official and the black market exchange rates, subject to early lifting of international economic sanctions.
The deal needs to be ratified by Iran and it has to be cleared through US channels which could take several months. Additionally, the deal also could face the test of stringent nuclear verification by external observers, a process that could take a year or more.
“Once it is approved, we assume it is in Iran’s interest to expedite the nuclear verification process as quickly as possible. By the end of the current Iranian [financial] year (March 2016), we assume sanctions on Iran could be lifted in the best-case scenario. Foreign investors have already made visits to Iran to prepare for this scenario,” said Charles Robertson, global chief economist of Renaissance Capital.
Even ahead of the nuclear deal, Iran’s economy has been on a strong recovery path. According to the latest data from the International Monetary Fund (IMF) and the IIF, Iran is projected to grow in excess of 3 per cent in 2015, driven by investments and consumption.
“Lifting the sanctions will allow the Iranian authorities to use more of their foreign exchange reserves [estimated at $90 billion, Dh330 billion], half of which have been frozen abroad. Business opportunities in Iran following a comprehensive agreement would be enormous. Iran has a population of 78 million, the labour force is relatively well educated, and the economy is more diversified than other oil exporters in the region,” said Garbis Iradian, Chief Economist, Africa/Middle East of IIF.
The agreement could restore Iran’s oil production and exports before mid-2017, adding to pressure for continued low oil prices beyond 2015. There are risks that the implementation of the deal will be further delayed as it needs to be reviewed by the US Congress.
Despite such potential roadblocks, analysts say the deal’s impact on domestic consumption, investment and trade in Iran would be enormous. “Our base case currently sees real GDP expanding 7.9 per cent in 2016. As one of the last ‘untapped’ frontier markets, which possesses natural resources, an educated workforce and an existing manufacturing base, it is no surprise that reports emerge on an almost daily basis of foreign investors positioning themselves for an eventual end to sanctions,” said Khatija Haque, Head of Mena Research at Emirates NBD.
Analysts say the nuclear deal could open floodgates of foreign direct investments and portfolio investments into the country.
“Iran is the largest and most important economy in our view that is still closed to institutional investors, with an educated 78 million population to rival the 77 million of Turkey; a $404 billion 2014 GDP that is larger than that of the UAE, Thailand or South Africa; and wages that are competitive with those of Vietnam; plus 9 per cent of the world’s oil reserves, close to Canada’s 10 per cent,” said Renaissance Capital’s Robertson.
The $95 billion market capitalisation of the stock market is larger than five MSCI emerging markets, and all MSCI frontier markets. “With roughly $100 million daily turnover and no Iranian restrictions on foreign involvement, we think portfolio flows could be significant as early as 2016,” said Robertson.