June 29, 2015 | Quote
Iran’s Economic Boost From Nuclear Deal Projected to Come Slowly
Iran may not see a rapid economic rebound from a potential nuclear deal that would lift the international sanctions now imposed on the country, according to new projections by Roubini Global Economics.
As nuclear negotiators in Vienna face a deadline within days, the study obtained by Bloomberg News finds that the benefits to Iran of a successful outcome wouldn’t gain traction before the second half of 2016, with growth constrained by low world oil prices, cautious foreign investors and uncertainty about Iranian government policies.
Iran could benefit relatively quickly from expanded imports, although such goods would remain costly because Iran’s currency, the rial, is projected to remain weak.
“The country is likely to experience moderate growth in fiscal year 2015-16 followed by an acceleration of economic growth in fiscal year 2016-17 as domestic investment begins to pick up,” according to the report, produced with the Foundation for Defense of Democracies, a group whose analysts advocate strict conditions for any nuclear deal with Iran.
The report also cast doubt on whether moves to reimpose effective sanctions in the event of Iranian violations — the “snapback” mechanism — would be effective as Iran builds a “more powerful and resilient” post-deal economy.
After two years of economic contraction amid low oil prices and international sanctions, Iran recorded 3.2 percent real GDP growth in the fiscal year ended in March, the report estimated.
The economy “bounced back in 2014 due in large part to reductions in sanctions pressure” following the interim nuclear deal reached in late 2013, the report said.
Since then, economic growth has slowed due to “dashed hopes of immediate economic improvements among the population, lower oil prices and greater austerity,” the report added.
The report projects 2.6 percent real GDP growth for 2015-16 if a final deal is struck, about 1 percentage point higher than if the current provisions continued.
The report doesn’t specify what policies should be adopted, but said that Iran would receive a lump-sum payment of as much as $50 billion from escrow accounts, and that oil exports would grow from 1.3 million barrels a day to 2 million over the next 12 months. Assuming an oil price of $60 per barrel Iran could receive with an additional $15.4 billion.
The growth projection is slightly below an estimate of 3 percent made in April by Masood Ahmed, director of the Middle East and Central Asia Department at the International Monetary Fund.
“Although a final deal will likely improve domestic sentiment as early as mid-to-late 2015, uncertainty of implementation, lower oil prices, and tight domestic policy all suggest growth will be slow to pick up in the second part of the year,” according to the Roubini-FDD report.
Growth is projected at 4.1 percent in the next fiscal year as oil revenues expand and enable greater government-led consumption, although foreign investors would “remain in the exploration phase,” the report said.
“In future years, investment could be a more meaningful driver of growth,” the report projected, adding that investment may remain “well below” 2011 levels even by 2018.
Iran sees the return of foreign firms as a key outcome from a potential nuclear deal. Executives from Royal Dutch Shell Plc, for one, visited to Tehran this month to discuss possible partnerships.
An outright failure in the nuclear talks could set in motion new sanctions, although the enforcement of those measures would depend on how the talks’ breakdown was interpreted in the international community, the report said.
Key Iranian decisions will affect the impact of a final deal, the report said. With a five- to 10-year time horizon, the report says post-deal annual growth could average 3.5 percent to 4 percent “or higher if the government front-loads structural reforms, attracts meaningful investment and avoids the development of asset bubbles.”
If Iranian authorities, however, fail to recognize the extent of global competition in the energy sector and thus don’t facilitate deals with attractive payouts and cost recovery, “Iran might struggle to attract the necessary capital to revitalize its oil and gas sector,” the report said.
Read the article here.