Country Rating

Rating: D

Business Climate Rating

Rating: C

Risk Assessment

Recession attributable to the tightening of international sanctions and persistence of high inflation

The economy has gone into recession due to the tightening of international sanctions, further intensified by the United States in June 2013. Oil, industrial and commercial activity is curbed by the very negative effect of the strengthening of these sanctions, while household consumption (the main component of GDP) is affected by the reduction of subsidies, increased unemployment (particularly among the young) and sharp price rises. 
Inflationary pressures are surging due to the gradual elimination of subsidies on everyday products since the end of 2010, the sanctions and the collapse of the rial.

Widening fiscal deficit and appearance of a current account deficit, but a still fairly comfortable external financial situation

The public accounts benefit from hydrocarbon revenues, which represent two thirds of tax income, and a policy of the gradual elimination of costly subsidies (10% of GDP). However, due to the decline in activity and the negative impact of international sanctions on hydrocarbon exports, the fiscal deficit will deepen sharply during 2013 (straddling two fiscal years). Nevertheless, although set to rise, the public debt level will remain sustainable. Moreover, the country has a reserve fund for future generations.

The external accounts will remain in deficit in 2013, despite high world oil prices. Oil sales will diminish due to a production fall-off - attributable to inadequate investment in modern technology - but additionally to international sanctions which also curb non-oil exports. At the same time, despite the need to import a proportion of refined fuel, the import bill is expected to decline because of restrictions imposed by the authorities and sanctions which complicate the financing of foreign trade.

Iran's external financial position is likely, however, to remain fairly comfortable because of very low external debt at around 3% of GDP. However, the level of foreign exchange reserves is falling and will represent the equivalent of 10 months' imports in 2013. Indeed, the collapse of the rial, linked to the sanctions and possible capital flight, linked to political uncertainties, constitute important weakness factors.

Change of President as of June 2013 and business suffering under impact of international sanctions

The Iranian presidential election in mid-June 2013 was won in the first round by Hassan Rowhani, a so-called moderate and pragmatic conservative, supported by the reformers, against the "fundamentalists" (hard-line conservatives). The outgoing and controversial president, Ahmadinejad, could not stand again having reached the two-term limit. Under the guidance of the Supreme Leader (highest religious and political authority), Ayatollah Ali Khamenei, the new President is expected to make more effective management of the economy one of his priorities.

Meanwhile, a report from the International Atomic Energy Agency on the advanced state of the Iranian nuclear program led to a further toughening of international sanctions at the end of 2011. The Western powers also increased the level of sanctions with an oil embargo since July 2012 and the blocking of most financial transactions with Iran (measures intensified by the United States in June 2013). It is however possible that a change in the Iranian nuclear policy, towards a less confrontational stance, could take place following the June 2013 election of a new President, with the danger of an Israeli attack on Iran's nuclear installation somewhat lessened, until the beginning of 2014, at least.

The effects of the sanctions are being felt in the various economic sectors and are increasing the trend towards self-sufficiency. These are also impacting on the business environment that has suffered greatly as a result of the political climate that dominated under President Ahmadinejad, together with institutional shortcomings.

Because of the suspension of the activities of western firms, Iran is developing its trade notably with China, India and Turkey. These countries are interested in Iranian hydrocarbons and are likely to contribute to necessary investment in the energy and petrochemical sectors. These new trading partners, however, use the sanctions as an excuse for trying to obtain preferential terms from their Iranian suppliers, while, moreover, being likely to suffer payment defaults on the part of Iranian buyers, particularly in connection with imports of agricultural products.