IRAN The Road Ahead Ahmad Azizi March 2016 Iran The road ahead - - PowerPoint PPT Presentation

IRAN

The Road Ahead

Ahmad Azizi – March 2016

Iran – The road ahead

• Why Iran?
• Economy
• Market Prospects
• Foreign Investment
• Challenges
• Banking
• Future Plans - GDP target & financial sector reform
• JCPOA
• … take away message

Why Iran? – Strategic & Stable Partner

• 18th largest economy (GDP – PPP - £1’400b source: IBRD)
• Diversified economy (oil only 15% , Service 53% of GDP)
• GDP growth 3% year ending March 2015
• Resource rich, Fossil fuel (Oil & Gas combined) - alterna[ve to Russia
• Strong infrastructure (need for modernisa[on)
• Market size, High GDP growth poten[als
• Young, educated & welcoming popula[on of 79m
• Highly-skilled labor force
• Priva[sa[on & deregula[on plans

Economy

• Recent Performance;
• GDP growth 3%
• Infla[on: CPI Feb 2016, 12.6% / PTP 9.6% (June 2014 = 45.1%)

PPI Feb 2016, 5.5% / PTP 3.4%

• Currency stability
• 11% reduc[on of interbank market rate (29% to 18%)
• TSE Index growth
• Unemployment 10.7%
• Liquidity growth 18.3% (as at Dec 2015 – 9 months)
• Monetary base 8.9% (as at Dec 2015 – 9 months)
• Money mul[plier: 6.4 (8.6% increase - Q3)
• Net foreign assets of CBI +16.9%

Economy - Continued

• Strategic loca[on, 16 neighbors, land and see access
• Very low foreign debt & Low government debt
• Impeccable payment track record despite revolu[on, war, sanc[ons etc.
• Historical surplus in all sec[ons of BOP
• Sizeable, historically capable banking sector with interna[onal experience
• Government support for banking sector
• Re-emergence aper liping of Sanc[ons (market poten[als)
• Stable in a turbulent region
• Vibrant and peaceful society (mul[-ethnicity)
• Elec[ons, etc

Economy: Positive Prospects

• EIU Projec[on:
• Major Analysts are forecas[ng considerable GDP growth for 2016:

FT Economist World Bank IMF IRAN 4.1 4.5 5.8 5.5 WORLD 2.8 2.7 2.8 3.4

% 2016 2017 2018 2019 2020 GDP 4.5 5.4 5.2 5.1 5.5

Economy: Positive Trends

• Recovery (GDP growth of 2015 – Y/E March 2015)
• Monetary and fiscal discipline
• Reduc[on of Infla[on
• Stability of FX market
• Market stability – Infla[onary Expecta[on Management
• Change in the composi[on of liquidity (indigenous)
• Reduc[on of interbank rate (from 29% to 19%)
• Planning currency unifica[on, countercyclical policies (debt & tax)

Foreign Investment, FIPPA

• Sovereign guarantee (FIPPA)
• Repatria[on guarantee
• Equal treatment with local investors
• Interna[onal arbitra[on, courts
• Need for :
• Ra[ng
• Currency Unifica[on & hedging instruments (IRR-EUR NDF is quoted)
• local financial system interac[on with Int. Fin. Markets
• More transparency, IFRS,

Foreign Investment Tax

• Flat corpora[on tax of 25%
• No dis[nc[on between Foreign & Local firms
• Personal tax maximum 35%
• VAT 9%
• Very low tax burden 9% GDP (France 44%)

Economic Challenges

• 1. Low oil prices (makes FX a poli[cal economy considera[on)
• 2. Overcoming years of disconnectedness, Remaining Sanc[ons, etc
• 3. Structural reforms; including financial sector reform (credit crunch,

shadow banking, NPL, low capital adequacy, capital market, Gov debt, correspondent banking, regula[on and supervision, resolu[on regimes, etc)

• 4. Business environment; Governance, Legal system reform,

Transparency, An[ corrup[on

• 5. Policy credibility, produc[vity, priva[sa[on,

Economic Challenges

• 6. Financial markets are not well integrated into world market
• 7. Nominal exchange rate (ER) as historical anchor of monetary policy
• 8. Failed nominal ER , pro-cyclical fiscal & credit policy: RER apprecia[on,

Dutch Disease & tradable output contrac[on

• 9. FX parity , specula[ve asacks, lack of hedging instrument

10.Debt Market Development

• 11. Bad Bank V Good Bank
• 12. Profit (Interest) rates, Infla[onary expecta[on & Monetary discipline

Economic Challenges– weak recovery

Sectoral Growth Rate 2000-2014

Economy: Challenges

Economy: Challenges

Banking – Balance sheet summary

Loans Assets Deposits Liabili[es

Government owned

3 17% 17% 19% 17%

Specialised Banks

5 26% 21% 13% 21%

De-na[onalised Banks

4 34% 33% 34% 32%

Private Banks

18 22% 27% 32% 27%

Credit Ins[tu[on

2 1% 2% 2% 2%

Total

32 100% 100% 100% 100%

Banking

• Past ten years;
• Sanc[ons impact:
• Technology & Know how deficits
• Higher transac[on costs
• IFRS, Compliance, Banks’ health indices
• Governance, regulatory and supervisory standards

2004 2012 2015 NPL 7.2% 14.7% 12.8% CAPITAL ADEQUACY 13.1% 9.6% 7.6% Government Debt to Banks / Total assets 2.4% 6% 6.8% Banks’ debt to CBI / Total asset 1.6% 6% 5.2%

Banking (continued)

• Financial suppression
• Government debt to Banks
• Mandatory facili[es & Mandatory rescheduling
• Mandatory Interest rates
• Investments in real market: Projects & property market
• Resulted in Credit and liquidity crunch
• Fairly developed payment systems

Banking (continued)

• Beser environment since 2013
• Posi[ve real rate returns on deposits
• Monetary & fiscal discipline
• Reduc[on of CBI reserve requirement
• QE Plan encouraging consumer borrowing
• Improved liquidity posi[on resul[ng from JCPOA

Future Plan - GDP Target & Financial Sector Reforms

• GDP target growth 8% for 2016 to 2020
• Enabling, providing and consistent enforcement of business laws
• Strengthen CBI to maintain monetary & financial stability, financial

development, strong regula[on and supervision

• Reform corporate governance, including IFRS
• Exchange unifica[on
• Financial safety net, including: Deposit protec[on, Credit bureau, ra[ng

agency etc

• Debt market reform
• Promo[ng FDI
• Integra[ng with the global financial system

JCPOA

• Landmark deal entails full termina[on of all Nuclear Related

sanc[ons; trust building process, momentum to cooperate

• P5+1 Commitments (sec28): Good faith and construc[ve atmosphere
• Refrain from any ac[on inconsistent with the leser, spirit & intent of

JCPOA

• Make every effort to support successful implementa[on
• Normalisa[on of trade and economic rela[ons (Sec[on 29-EU)
• Ensure access in areas of trade, technology, finance and energy
• Facilitate trade, project financing and investment in Iran

JCPOA (continued)

• Liping of sanc[os is comprehensive (annex 5)
• Consulta[on with Iran in draping the JCPOA Guidelines
• Snap back would not apply retroac[vely
• Problems: Remaining USA sanc[ons (mainly primary)
• US$
• SDN list
• US firms prohibited but their subsidiaries may be allowed
• Implementa[on risk; Snap-back V Huge investment by par[es
• Result: Availability of Correspondent banking services, star[ng point

JCPOA – Challenges & risks

• Slow provision of correspondent banking services
• Poli[cal maneuvering e.g. US congress …
• DPAs (deferred prosecu[on agreement)
• Fines & fear of USA Government
• Ongoing inves[ga[ons
• Extraterritoriality in applica[on of American laws
• Guidelines (not effec[ve reflec[on of commitments made under JCPOA)
• FATF statement on Iran
• Snap-back, Dual use, US components
• JCPOA – Major breakthrough but not enough

JCPOA – Challenges & risks

• High cost of compliance & cost of failures (Fines – US & EU enforcement)
• Slow provision of correspondent banking services-CBS (Threat of loss of CBS)
• Poli[cal maneuvering e.g. US congress …
• Terms of DPAs (deferred prosecu[on agreement)
• Fines & fear of USA Government / Ongoing inves[ga[ons
• Dollarisa[on (conversion etc)
• Extraterritoriality in applica[on of American laws
• Guidelines (not effec[ve reflec[on of commitments made under JCPOA)
• FATF statement on Iran
• Snap-back, Dual use, US components
• JCPOA – Major breakthrough but not enough

JCPOA - Upsets

• Dr Zarif: USA should act to remove psychological barriers
• Minister of Agriculture:

I feel sorry when I see our foreign counterparts are only aper selling their products

… message

• East or West
• East is coming with packages of billions of finance
• Some in the west are more enthusias[c than others
• Iran is a rear opportunity with huge poten[al
• Removal of sanc[ons are good but not enough
• More to be done by US & EU to ensure delivery of JCPOA promises
• Need for structural reform to ensure higher growth trajectory
• Expecta[on Gap/management:
• Strong infrastructure is available for higher growth

… quotes on Iran

• EIU: No market in the world has the same level of untapped poten[al
• Federica Mogherini: The EU should strive to create a broader network
• f key actors in the Middle East including Iran

Iran – The road ahead Thank you