Capital Intelligence Ratings (CI Ratings), the international credit rating agency, announced that it has affirmed Iran’s long-term foreign and local currency sovereign ratings of ‘BB-’, and its short-term foreign and local currency sovereign ratings of ‘B’. The outlook for Iran’s ratings remains ‘stable’.
CPI Financial reported on Sunday the ratings reflect the improved short- to medium-term outlook for the economy following the recent lifting of international economic and financial sanctions related to the country’s nuclear program. As a result, Iran has begun to repatriate previously frozen external financial assets, export more hydrocarbons, and re-access international financial and banking markets. The removal of sanctions has also facilitated trade diversification, thereby improving the country’s medium-term economic growth prospects.
CI Ratings expects the combination of higher oil production, lower costs for trade and financial transactions, as well as restored access to foreign assets to support real GDP growth of about 3.8 % in FYE 2017-18. Improved terms of trade and renewed access to foreign assets and capital are also expected to increase the stability of the exchange rate and possibly help contain inflation, bringing it down to around 6% in FYE 2018, compared to a record high of 40% in 2013 when President Hassan Rouhani was elected.
Public finances are expected to improve as well, albeit at a slower pace in view of the steep decline in oil prices since mid-2014, and amid fierce competition for market share, especially with (P)GCC member states. The budget is expected to post a small deficit in 2016, and to register a small surplus of 0.5 % of GDP in FYE 2017-18, based on the assumption of average oil prices of $50 a barrel.
Iran’s public debt remains low and official foreign assets remain sizeable, estimated by CI Ratings to be equivalent to around 14.5 months of imports of goods and services and around 12 times as high as external debt payments falling due in 2016, although there is still some ambiguity regarding the liquidity and usability of these assets.
Sovereign Ratings Constrained
CI reckons the internal political situation is reasonably stable, and a victory for supporters of the current government in recent legislative elections has raised the prospect of greater economic reform going forward. Geopolitical risk remains a material rating factor, however, given the escalating conflict in neighboring Iraq, as well as in Syria and Yemen, and in addition to the ongoing tension with the (P)GCC member states, namely Saudi Arabia.
Notwithstanding the above positive developments, Iran’s sovereign ratings remain constrained by the heavy reliance on oil (the price of which is currently below the break-even fiscal level), by the limited disclosure of data, and fundamental weaknesses in the economy which have been aggravated by the long period of economic sanctions. The ratings are also constrained by continued expenditure rigidity, as well as the weak financial system, institutional shortcomings and complex internal politics.
The outlook for the ratings is ‘stable’. This indicates that Iran’s sovereign ratings are likely to remain unchanged within the next 12 months provided that key metrics evolve as envisioned in CI Ratings’ baseline scenario and no other credit quality concerns arise.
The ‘stable’ outlook balances the projected positive outcome of lifting the sanctions against the prolonged period of low oil prices and the concerns of spillover from the conflict in neighboring countries.
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