World  Business and Economic Analysis 

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The Organization for Economic Cooperation and Development (OECD) has unsurprisingly upgraded Iran's rating in the country risk classifications of the Participants to the Arrangement on Officially Supported Export Credits (CRE) from 6 to 5.

The long-awaited upgrade was announced following the organization’s last meeting on Friday. The last upgrade in Iran’s rating goes back to June 2016, when Iran’s ranking improved one notch, moving from 7 to 6.

The country risk classifications of the Participants to the Arrangement on Officially Supported Export Credits are one of the most fundamental building blocks of the arrangement rules on minimum premium rates for credit risk, according to OECD.

The important decision comes amid growing concerns over the future of the nuclear agreement signed in 2016 by Iran and the six world powers, mainly due to US President Donald Trump’s hostile approach toward the historic deal. Trump recently threatened to abandon the deal in spring unless it is fixed to his liking. His secretary of state, Rex Tillerson, held talks with Europeans this week to persuade them to join the US in amending the nuclear agreement and imposing new sanctions on Iran.

“This was indeed a positive signal from the Europeans and a further indication of their interest to continue engaging with Iran within the framework of the nuclear deal,” Arash Shahraini, deputy head of Export Guarantee Fund of Iran, told the Financial Tribune in a telephone interview on Friday.

“The upgrade reduces the cost of attracting foreign finance, and as a result helps us increase our foreign exchange reserves,” he said.

Deserving Better

But the measure was not unexpected for Tehran as the authorities had been waiting for the upgrade after the economic sanctions were eased in January 2016.

Pointing to country’s reserves and low external debt, Shahraini is of the opinion that Iran deserves a higher classification, namely 3 or even 2.

As the OECD puts it, the country risk classifications are meant to reflect country risk, which is composed of transfer and convertibility risk (i.e. the risk that a government imposes capital or exchange controls that prevent an entity from converting local currency into foreign currency and/or transferring funds to creditors located outside the country) and cases of force majeure (e.g. war, expropriation, revolution, civil disturbance, floods, earthquakes).

Iran’s official reserves were projected at $123.5 billion in 2016-17, according to a report released by the International Monetary Fund in February 2017. The country’s total debt to GDP stood at 2.2%, which is lower than any other country in the world.. Iran also recorded the highest economic growth in the world according to the global lender’s 2016 report – 12.5%.

A recent report published by the EGFI, Iran’s state-owned export credit agency, compares Iran’s economic indicators with the average performance of countries in each risk classification, backing its claim that Iran has outperformed other countries in 2016 and deserves lower risk.

The senior EGFI official said, “There are other factors that have a bearing on the OECD’s final assessment including political risks and a country’s history in settling its external debts,” he said.

Due to the constraints in financial relations with its foreign trade partners, Iran had been unable to settle $3 billion of its external debts during the sanctions era. “However, following the lifting of the sanctions this issue was prioritized by the Central Bank of Iran…within a year we either repaid our debts or reached agreements over restructuring.”

Non-OECD Finance Already Here

Shahraini believes that the upgrade in Iran’s risk classification will help encourage financial institutions in the OECD-member countries to engage with Iran, where their non-OECD competitors have already started doing business.

Iran has concluded several foreign finance contracts in the past six months including two agreements worth $25 billion with China Development Bank and CITIC Trust, a no-cap deal with Russia’s Exim Bank, a €5 billion deal with Italy’s Invitalia Global Investment, a €1 billion deal with Austria’s Oberbank, a €500 million deal with Denmark's Danske Bank and two contracts worth €13 billion with South Korea’s Exim Bank and K-Sure.

Unlike OECD members, export credit agencies in the BRICS countries (Brazil, Russia, India, China and South Africa) have gradually improved Iran's rating in their risk classifications since the nuclear deal was implemented. The five-nation bloc now accounts for one-third of Iran’s non-oil trade.

 

According to  Fdi  ,espite increased international isolation and diplomatic tensions, the OECD has an optimistic view on Iran. Sebastian Shehadi reports.

The OECD has upgraded Iran’s country credit risk rating to 5 from 6 (out of 7), putting it on par with Brazil and Jordan, among others, the Paris-based institution said in a statement on January 26.

‘Country risk’ encompasses unforeseeable circumstances, such as political unrest and natural disasters, and transfer and convertibility risk, such as governments’ imposing capital or exchange controls (that is, banning foreign remittances). The methodology classifies “countries in connection with their agreement on minimum premium fees for official export credits”, according to the OECD website.

“A better risk rating will serve to boost Iran's financial and credit status in international markets, as well as provide potential incentives for Asian and European partners to deepen their respective levels of engagement with the Islamic Republic,” said James Appleyard, managing consultant at global risk and strategic consulting firm Verisk Maplecroft.

Iran’s ranking previously moved up a grade in June 2016, from 7 to 6. Iran’s investment promotion agency, the Organization for Investment Economic and Technical Assistance (OIETA), said the country’s economic performance accounts for the upgrades, along with the efforts made by its central bank, foreign ministry, the Export Guarantee Fund of Iran, and the OIETA. As a result, Iran’s exports soared by an estimated 41.3% in 2016, while imports remained around the more usual mark of 6%, according to the World Bank.  

The OECD’s decision comes amid rising sociopolitical unrest in Iran and growing concerns over the future of the 2016 nuclear agreement signed by Iran and the P5+1 group. In 2017, US president Donald Trump threatened to abandon the deal unless certain conditions were met.

In early January 2018, Iran experienced its worst bout of political unrest since 2009, resulting in dozens of deaths and hundreds of arrests. The protesters claimed to be rallying against rampant corruption, rising fuel and food prices, as well as dashed hopes following the lifting of UN and EU (but not US) sanctions against Iran in 2015 and 2016, after which the public expected better economic development.

The main factor behind the OECD’s upgrade was Iran’s positive macroeconomic indicators, as evidenced by the IMF, which projected Iran’s real GDP to expand by 3.5% and 3.8% in 2017 and 2018, respectively, according to Dr Arshin Adib-Moghaddam, an expert on Iran at the School of Oriental and African Studies. In 2022, the IMF estimates Iran’s economic growth will stand at 4.1%. “The [recent] protests were about the mismanagement of distribution of some of these economic gains, rather than the economy itself,” he added.

Dr Scott Lucas, professor of international politics at the UK’s University of Birmingham, said the OECD’s risk ratings can be rather bullish and positive. Like any international organisation, it may also have an agenda: in this case, keeping the Iran nuclear deal in place.

The World Bank’s latest Iran report (October 2017) also gave a positive, albeit tempered, outlook. “The Iranian economy strongly recovered in 2016, on the back of a significant rise in oil production and exports, following the removal of nuclear related international sanctions,” it said. “However, unemployment remains high and non-oil sector activity remains subdued, as anticipated foreign investment flows have not materialised, in the absence of a full integration of the banking sector with the global banking system and continued uncertainties regarding full implementation of the [nuclear deal]. Growth prospects in the medium term are modest.”

Following the nuclear deal and the lifting of sanctions in 2016, Iran’s inbound greenfield investment soared, reaching a record high of $12.18bn, according to greenfield investment monitor fDi Markets. In 2017, this figure returned to Iran’s more usual FDI mark of $2.13bn.

 

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