Iran update: Assessing the current market environment - Dr. Vedat Mizrahi 21 March 2017 - Global Trade ...
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Iran update: Assessing the current market
environment
Dr. Vedat Mizrahi
21 March 2017
© 2017 ÜNLÜ & Co | Özel ve gizlidir
1
Table of Contents
Section Page
I. Political scene a year after the nuclear agreement 03
II. State of the Iranian economy and foreign direct investment 07
III. Appendix 15
I. Political scene a year after the nuclear
agreement
3
Will the Nuclear Deal with Iran begin to unravel?
Renewed external uncertainty
→ Uncertainties on how the Trump Administration will handle the Iran Nuclear Deal
→ On one hand, President Trump has been harshly critical of the deal, which he called “the worst deal I have ever seen negotiated.”
→ On the other hand, the U.S. has limited options outside the deal. The status quo is no longer available; UN and EU sanctions have
been limited and are unlikely to be re‐imposed.
→ It would be hard for the U.S. to restore the level of economic pressure on Iran that persuaded Iran to negotiate in the first place.
Russia, with whom the Trump Administration has promised to work more closely, will certainly encourage the U.S. to stay within the
deal.
→ The U.S. and Iran will continue to test each other
→ Iran has continued a series of ballistic missile tests, which U.S. officials believe to be a violation of the terms of the Joint
Comprehensive Plan of Action (JCPOA).
→ The U.S. has responded by imposing new sanctions on 25 individuals and entities involved in the ballistic missile program, some of
whom are based in China, the UAE and Lebanon after Iran carried out a missile test on 29 January 2017.
→ These new sanctions are symbolic and their impact is limited. Most of the Iranian entities and individuals being targeted do not have US
assets that can be frozen.
4
New sanctions may not be enforced
New sanctions by the US will not be effective without the participation of Europe, China and Russia
→ There is substantial pressure in Congress for tighter non‐nuclear sanctions on Iran
→ The new US administration may reinstate UN sanctions by invoking the “snapback” provisions in the Iran deal, but this would be very
risky.
→ Other UN members (particularly the EU, China, and Russia) might not enforce the sanctions, and Iran would almost certainly take the
opportunity to walk away from its obligations under the deal.
→ For the EU, the nuclear deal is considered the best alternative to either a war between Iran and Israel, or an Iranian nuclear bomb. The
EU would only agree on new sanctions if Iran fails to comply with the nuclear deal.
→ A friendly US‐Russia relationship could mitigate the risk of an escalation in tensions between Iran and the United States, given that the
Russians could act as a mediator.
→ If the nuclear deal is undermined it would strengthen the position of hardliners, including the elite Revolutionary Guard, and damage Rouhani’s
prospects of being reelected in May
→ Such an outcome would make the regional conflicts more entrenched and raise the risk of war with Israel.
→ Recently, the Iranian Parliament has asked the government to resume enrichment of uranium if the US tries to renegotiate the nuclear
deal.
→ Ultimately, the new US administration may find the deal hard to unwind.
5
Power struggle in Iran
The political scene in Iran is polarized
→ Iran prepares for Presidential Elections in May 2017
→ The power struggle between pro‐reform forces and regime hardliners (including the Revolutionary Guard, the Judiciary and
Conservative Clerics) is expected to intensify
→ Current President Rouhani is seeking to be re‐elected
→ The death of Rafsanjani (the former President, and a key ally of Rouhani) may complicate the current power struggle
→ A period of more radical foreign policy may be in the cards
→ Hardliners are yet to decide on their consensus Presidential candidate
→ Rouhani is being critized for failing to promote domestic investment following the lifting of economic sanctions in early 2016
→ Nonetheless, Rouhani is in a strong position to be re‐elected for a second four‐year term as he has managed to unite reformist and
moderate conservative fractions to support his economic reform agenda
II. State of the Iranian economy and foreign
direct investment7
Foreign banks still cautious
US maintains economic pressure on Iran
→ International banks are still cautious about doing business in Iran,
→ US dollar clearing restrictions have not been lifted and continue to pose a major challenge for global banks to re‐establish
correspondent banking relations
→ This in turn restricts access to corpoate trade and primary sanctions remain in place
→ In addition to maintaining a broad domestic trade embargo prohibiting most transactions between US individuals and Iranian entities,
the US also retained sanctions on Iranian entities connected to terrorism financing, human rights abuses and the ballistic missile
program.,
→ Foreign firms may be subject to US secondary sanctions for facilitating financial transactions with designated Iranian institutions.
→ ...in part because the US still retains extensive sanctions against Iran
→ The US Department of Treasury took some action in Fall 2016 to alleviate foreign bank concerns by issuing guidance that US banks can
do dollar trades with Iran, provided that they do not pass through a US institution.
→ However, following the elections in the US, there is strong support in the Congress and in the new Administration for maintaining
economic pressure on Iran.
→ In late 2016, the Congress passed a 10‐year extension of the Iran Sanctions Act, which provided the framework for secondary
sanctions.8
Limited progress in economic reforms
Risks to the outlook beyond near‐term are significant
→ Structural economic reforms are necessary to achieve sustained growth and to reduce the unemployment rate
→ Business environment needs to be improved in additionto maintaining political stability and better relations with the international
community
→ The country suffers from large infrastructure deficiencies: Its oil fields have been crippled as sanctions kept needed equipment and
machinery out of the country
→ The energy sector alone requires at least USD100bn in the next five years to make up for the under‐investment in the past
decade
→ Business discrimination, legal uncertainties and widespread corruption hinder a strong recovery in investment
→ Iran ranks 76th out of 138 by the World Economic Forum (WEF) in terms of competitiveness
→ Some priority measures that could address these challenges include streamlining business regulations and an affirmation of investor
rights.
→ Financial market development and labor market efficiency are other areas that need to be tackled.
→ International trade integration would complement the reforms in boosting lagging productivity.9
Banking system is fragile
Iranian banking sector needs to consolidate and to be recapitalised
→ Fragile domestic banking system, continued difficulties in reconnecting to the global financial system and hurdles to reform the regulatory
system have held back major long‐term commitments to invest
→ Continued public payment arrears, related‐party lending and poor management of the banking system has weakened the balance
sheets of the banks
→ Iranian banks need large capital injection, management restructuring and governance improvements
→ Poor management and sanctions over the past few years have led to a sharp increase in non‐performing loans (NPLs), which reached
12% of total loans in 2016, well above the GCC average of 3%
→ The capital adequacy ratio has continued to deteriorate from 8.5% in 2012 to slightly less than 6% in 2016
→ Profitability remains constrained by the high cost of funding
→ High NPLs and tight cash‐flows in the financial and corporate sectors continue to undermine domestic investment
→ Iranian bankers are also frustrated at the slow progress in finding European banks to handle international payments for them
→ In July 2016, the Central Bank of Iran cut the lending rate following private banks move to lower the one‐year deposit rate from 18% to 15%
→ Further cuts in the lending rates are unlikely given the high NPLs and the recent up‐tick in the CPI inflation rate to 9.6% in January 2017.10
IMF Report on Iran
IMF concludes 2016 Article IV Consultation with the Islamic Republic of Iran on 27 February
→ In its recent report, IMF emphasizes the importance of
→ Maintaining prudent economic policies and building buffers
→ Strengthening the financial sector through
→ Enhanced supervision of distressed banks
→ Asset quality review to identify viable banks that warrant recapitalisation
→ Advancing reforms to lessen Iran’s reliance on oil, while using oil revenues to fund bank recapitalisation
→ Develop private sector
→ Implement a medium‐term fiscal framework to underpin their commitment to prudent fiscal policy
→ IMF welcomes recent steps to
→ Strengthen the AML/CFT framework
→ Introduction of IFRS reporting in banks
→ Audit and securitization of government arrears
→ Underscores the authorities’ commitment to unify the exchange rate and shift to a managed float by early 2018
→ IMF projects GDP growth to stabilise at 4.5% in the medium‐term as the recovery broadens
→ Real GDP growth is expected to reach 6.6% in 2016/17 and to ease to 3.3% in 2017/18 as oil production remains at the OPEC target11
Business Activity Overview
Automotive
→ The production line of a newly formed joint venture between Volkswagen and the Iranian automotive company Mammut Khodro will be
launched by the end of the current Iranian fiscal year that ends in March 2017.
→ The first CVT transmission‐manufacturing factory named 'Qova Moharekeh Punch Powertrain Iran' was inaugurated in Zanjan (northwestern
Iran), in a partnership deal between the Belgian firm, Punch Powertrain and the Industrial Development and Renovation Organization (IDRO).
The project will be executed in three phases. In the first phase Punch Powertrain will invest USD27.5mn in the plant.
→ Scania has signed an agreement in principle with the Iranian province of Isfahan and Shahr‐e Atiyeh Investment Company on the delivery of
1,350 buses for public transport for Isfahan and four other Iranian cities. The first of these new buses will be in operation at the end of 2017.
Aviation
→ Tehran has reached a deal with an international aircraft leasing company to finance the acquisition of 77 planes from Boeing and Airbus.
→ Under a finalized deal valued at $400 million for 20 passenger planes, French‐Italian aircraft manufacturer ATR will deliver three or four
passenger planes to Iran Air by March 20.
→ The first Brazilian Embraer airplane joined Iran's air fleet. Four additional Embraer 195 planes will be added to the aviation fleet by March 20.
→ Russian Energy Minister Alexander Novak announced that Iran has confirmed its intention to buy 12 Russian‐made Sukhoi Superjet 100 in the
near future.
→ French construction company Vinci SA has signed a Memorandum of Understanding (MoU) for the development of Mashhad International
Airport.12
Business Activity Overview
Oil & Gas
→ According to a top National Iranian Oil Company (NIOC) official, Total has officially started the development of Phase 11 of Iran's South Pars
natural gas zone, a major project which it will develop together with Iran's Petropars and China's CNPC. The three signed a Heads of
Agreement (HOA) with the NIOC last November to invest USD4.8bn in the project.
→ Germany's BASF is in talks with Iran on possible investment in the country's oil and gas sector. Chief Executive Kurt Bock said that such talks
were limited to investments in oil and gas exploration and production and did not extend to downstream petrochemical processing plants.
→ China’s Wuhan Company has signed a Memorandum of Understanding (MoU) to invest USD3.6bn in Iran’s Masjed Soleiman Petrochemical
Industries Company.
→ Total is reportedly in talks to buy a multi‐billion dollar stake in Iran's partly built liquefied natural gas (LNG) export facility, Iran LNG. The French
oil major, the first of its peers to strike deals in Iran after sanctions, is seeking entry into Iran LNG at a discount to the pre‐sanctions price in
exchange for reviving the stalled project.
→ Malaysia's Bukhary International Ventures (BIV) and the National Iranian Oil Company (NIOC) have signed a MoU for carrying out studies over
Iran's Golshan and Ferdowsi fields.
→ Tehran and Muscat have signed a preliminary agreement for a major offshore pipeline project to supply Iranian natural gas to Oman, with
Total S.A., Royal Dutch Shell, Uniper SE, Mitsui and Korea Gas Corporation top in line to implement the project. The pipeline will not cross the
United Arab Emirates (UAE).13
Business Activity Overview
Energy
→ Turkish energy company Unit International's USD4.2bn preliminary deal with the Energy Ministry in June to build gas power plants in seven
regions with a total output capacity of 6,000 MW has been cut down to one‐third. Under the revised deal, the Turkish company will initially
just construct two combined cycle power plants.
→ Russia and Iran have begun the construction of a 1.4 GW thermal power plant in the city of Bandar Abbas in southern Iran.
Hospitality
→ The Dubai‐based hotel firm Ramee Group is eying an entry into the Iranian tourism market. The Group’s Director of Operations in India, Nihit
Srivastava, has said Iran is among the new markets that Ramee is watching closely.
Retail
→ Turkish discount retailer BIM Birlesik Magazalar (BIM) is exploring opportunities for possible opening of stores in Iran. The supplier of basic
food items and consumer goods says it is about to be granted authorization to initiate marketing research studies to determine opportunities
and investment potential in Iran’s retail market.
Steel
→ Japan's Sojitz Corporation, has signed a preliminary agreement to study the production of steel sheets in Iran's southeastern port of Chabahar
in Sistan‐Baluchestan Province. The agreement is to be implemented under a credit line of $10 billion that Japan has allocated to Iran..III. Appendix
15
Middle Income Country
→ Iran is a middle‐income country with GDP (PPP) of USD1.46bn and per capita PPP of USD18,136.
→ GDP grew 330% and per capita GDP has more than doubled since the 1979 revolution.
→ Poverty has been virtually eradicated, with only 2% of the population living on less than USD1.0/day.
Per Capita GDP (PPP, 2016)
Source: IMF, World Economic Outlook16
Modern Infrastructure
→ Iran has a fairly modern infrastructure, including ports, domestic airports, roads and communications’ infrastructure.
→ However, infrastructure built with Western help in the 1690s and 1970s is aging and in need of capital investment.
(2)
Source: The World Bank17 Higher Education Higher Education Rates Scientific and Technical Education Rates Source: UNESCO
18
Largest Hydrocarbon Reserves in the World
→ 157 billion barrels of proven oil reserves
→ 34 trillion cubic meters of proven natural gas reserves
→ Crude extraction costs are among the lowest in the world at 10‐15 US$ per barrel
→ Only country with access to both Persian Gulf and the Caspian Sea hydrocarbons basins
Proved Crude Oil and Natural Gas Reserves (2013)
Source: BP Statistical Review of World Energy 201319
The Iranian Economy at a Glance
2015/16 2016/17 2017/18
Population (Million) 79.5 80.5 81.4
GDP – PPP (Billion of current international dollars) 1,380 1,460 1,550
GDP Growth (%) 0.4% 6.6% 3.5%
Per Capita GDP (PPP) – Current international dollars per capita 17,350 18,136 19,050
Gross Government Debt (as a % of GDP) 15.9% 14.9% 15.0%
Gross Government Net Debt (as a % of GDP) 1.7% 1.1% 1.0%
Gross National Saving (as a % of GDP) 31.6% 33.0% 31.9%
Inflation (average consumer prices, annual percent change) 11.9% 7.4% 7.2%
Inflation (end of period consumer prices, annual percent change) 8.3% 8.0% 6.5%
Unemployment 10.8% 11.3% 11.2%
Source: IMF20
Major Oil Producer Despite Sanctions
→ Iran produces 3.6 million barrels of crude oil per day and
could easily rebound to pre‐sanctions production levels of 4
million barrels per day.
→ Iran’s target is 5.7 million barrels per day of crude oil
production by 2018.
→ Iran exports 2.5 million barrels of crude oil per day which is
equivalent to its pre‐sanctions export levels
→ Iran is one of the few countries with the technical ability to
perform deep‐water drilling.
→ Iran is well‐placed for exporting crude oil and has an
excellent pipeline and port infrastructure.21
Diversified Economy
→ 57% of Iranian exports are non‐oil and gas.
→ During the tightening of sanctions, the non‐oil sector reached a
historic 90% share of GDP as Iran was forced to diversify its economy.
→ This helped Iran to manage the transition to lower oil prices, which
proved a greater challenge for many other oil exporters.
→ Under advice from the IMF, the government has been successful in
implementing more stringent disciplinary measures supporting tax
collection.
→ New tax measures and greater supervisory controls are helping
prevention of tax evasion.
* Oil and Gas sector industries crude oil and condensate excluding petrochemical products22
Not just about oil… A Major Metals Producer
→ Iran’s main copper and iron ore deposits are in Yazd and Kerman,
with good access to infrastructure and ports.
→ Much of the mining sector has been privatized and there is a need
for mining technology and investment.
In… Iran is the…
Cement 4th largest producer
chromite 9th largest producer
Iron Ore 10th largest producer
Zinc 15th largest producer
Copper 17th largest producer
Lead 23th largest producer23
Established Manufacturing & Industry Capabilities
→ Iran is the largest car producer in the Middle East, production 1.6
million cars in 2011 – the year before the Iranian auto sector was
placed under sanctions.
→ Iran has one of the largest construction industries in the region
and is a major producer of cement, steel and petrochemicals.
→ Last year Iran exported billion 2.3 US$ OF technical and
engineering services with a growth of 40% y‐o‐y in Q1 of this year.
Photo: Production at Iran Khodro, the largest car producer, rose 133% in April‐ august
2015, year on year, mainly due to an easing of trade sanctions.
Source: Irankhodro, Trade Promotion Organization of Iran24
Virtually Debt-Free
→ Iran’s gross government debt is 14.9% of GDP and net debt is 1.1% of GDP.
→ Central Bank reserves are over billion 100US$.
→ Gross national savings is 33.0%, behind only China.
General Government Gross Debt (% GDP) Gross National Saving (% GDP)
Source: IMF, World Bank25
Middle Class Population Increasing
Per Capita GDP (PPP)
Percentage of Population Living in Poverty
Source: IMF, World Bank26
The Potential of Iran: Ambitious Reforms Underway
→ The reform program is intended to lower inflation, expand employment and increase trade
→ Policies include deregulation, tax reform, monetary discipline and privatization
→ The IMF endorsed the reform agenda after a February 2014 visit to Iran
Structural Reforms Timeline
Source: Turquoise Partners27
Privatization
→ Iran has been privatizing state‐owned assets since 1988.
→ A total of billion 119 US$ in state assets is privatized since 2006, including 15 of Iran’s 30 largest companies.
→ The target is to reduce state ownership from 75% to 20% of the economy by 2017.
→ Privatization under former President Ahmadinejad transferred substantial assets to state entities such as the Social Security Fund and to well‐
connected «foundations »(bonyads). These shares are now returning to the market.
→ President Rouhani has ordered quasi‐state organizations and bonyads to limit themselves to activities that do not compete with the private sector
(such as charity and development work).
Before privatization 10 Year Target
State 75% State 20%
Mandatory
Private 20% Implementation Private 55%
Co‐op 5% Co‐op 25%
Source: Privatization Organization of Iran – The Privatization Program is often referred as The Article 44 Program’ referring to Article 44 of the Constitution which permits multiple forms
of ownership28
Tehran Stock Exchange & Iran Farabourse
→ Tehran Stock Exchange (TSE) was founded in 1967 Tehran Stock Exchange
Market Capitalization USD 103 Billion As of Dec 2016
→ TSE has high standards for listing companies and rates listed companies
Free Float 21% As of August 2016
for their corporate governance performance
Listed Companies 320 As of Dec 2016
Average Daily Trading Volume USD 54 Million As of Dec 2016
→ Dividends and capital gains are tax‐exempt for domestic and foreign
investors Member Brokerage 108 As of Dec 2016
→ Clearing‐and‐settlement is book entry and T+3. All clearing‐and‐
settlement is handled by the Central Depository of Iran Iran Farabourse
→ A new trading system has been introduced resulting in no failed trades, Market Capitalization USD 25Million As of 19 Jan 2016
faster trades, real‐time data, and online trading
Free Float 22% As of August 2016
→ Daily price fluctuations are limited to +/‐5% Listed Companies 145 As of 21 Oct 2016
Average Daily Trading Volume USD 25Million As of 19 Jan 2016
→ New products being introduced, such as commodities and financial
derivatives (futures contracts for gold coins and stocks), With promise of
more to come *Converted at the market rate of 39,400
**Average daily trading over last 9 months (March 2016 – 20 Dec 2016).
Source: TSE, Farabourse29 Fundamental Ratio Comparison Country P/E P/B Dividend Yield (%) Iran 7.5 1.8 10.8 Kuwait 15.7 1.1 4.3 MSCI Emerging Markets 14.3 1.5 2.6 Qatar 13.4 1.1 4.0 MSCI Egypt 16.1 3.1 0.9 MSCI Frontier Markets 13.0 1.6 4.3 Saudi Arabia 12.3 1.4 4.9 UAE 9.5 1.3 5.5 Oman 9.3 1.1 5.4 MSCI Turkey 9.3 1.2 2.8 Source: MSCI, Kamcoonline, TSE, All data are as of ending December 2016
30
Structure of the Capital Market
Supreme Council of the Exchange
Minister of Economics, Minister of Trade, Governor of the Central Bank, Attorney General, Chairman of
High‐Level Policy the SEO, representatives of active market participants, 3 experts
Regulation and Supervision Securities and Exchange Organization
Appointed by the Supreme Council of the Exchange
Markets Tehran Stock Farabourse Mercantile Exchange
Exchange (OTC Market)
Clearing, Settlement, Custody
Central
Depository
Members
Brokerage Houses
Source: TSE31 Composition of Market by Sector Sector Composition Sector Composition Chemical & By Products %20.9 Iran %4.0 Monetary Intermediation %11.2 Kuwait %2.9 Basic Metals %9.5 MSCI Emerging Markets %2.7 Telecommunication %8.0 Qatar %2.7 Diversified Industrial (Holdings) %6.9 MSCI Egypt %2.3 Refined Petroleum Products %6.3 MSCI Frontier Markets %2.1 Metal Ores Mining %5.5 Saudi Arabia %1.9 Motor Vehicles and Auto Pars %5.3 UAE %1.3 Source: TSE
32
Top 20 Listed Companies by Market Cap
No Name Company
1 Persian Gulf Petrochemical
2 Mobile Telecommunication Company of Iran
3 Telecommunication Company of Iran
4 Mobarakeh Steel Co.
5 Ghadir Investment Holding
6 National Iranian Copper Industries Co.
7 Jam Petrochemical Co.
8 Persian Oil and Gas Development Group Co.
9 Tamin Petrochemical
10 Golgohar Mining & Industrial Co.
11 Islamic Republic of Iran Shipping Lines
12 Bandar‐Abbas Oil Refinery
13 Mobin Petrochemical
14 Esfahan oil Refining Co.
15 Omid Invetment Group Corporation
16 Informatics Services Corporation
17 Chadormalu mining & industrial Co.
18 Pardis Petrochemical
19 Khuzestan Steel Company
20 Civil Servants Pension Organization
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