Economy, Business And Markets

Falling Oil Prices Predicted to Affect Economy

Falling Oil Prices Predicted to Affect EconomyFalling Oil Prices Predicted to Affect Economy

Lower oil prices will have a negative effect on Iran’s economic and financial systems in the next Iranian year, Business Monitor International predicts.

Plunging oil prices in the international market, the report says in its latest forecast, will result in a fiscal deficit of 2.9% of GDP in the year ending March 20, 2016, from a 0.4% deficit in the previous year. This will force the Iranian government to cut government spending on infrastructure projects.

In addition, it is expected that Iran’s government is to cut food and energy subsidies over the coming months, which will result in persistently elevated price pressures and slow expansion in private consumption.  Both factors will contribute to a significant deceleration of deposit growth over the coming quarters, the report says.

The report also highlights that the issue of high non-performing loans (NPLs) in Iran will remain pressing in 2015. The NPL ratio for commercial banks is currently at 14.2%, and BMI expects the banks to be increasingly cautious in lending as lower oil prices result in a deteriorating macroeconomic situation.

BMI projects total lending to contract by 2.0% in the year ending March 20, 2016, after remaining flat in the year before.

Risks of defaults of Iranian banks will increase in 2015, predicts the report. The Iranian banking industry’s debt to the central bank stood at 680 trillion ($24.9 billion) at the end of September 2014, a 9.7% increase compared to its level in February 2014.

While Iran will receive approximately $700 million per month from its frozen international accounts under the extension of an interim agreement on its nuclear program, which will go some way towards bolstering the central bank’s firepower, this will do little to counter the effect of lower oil prices over the coming quarters and thus risks to the industry’s fundamental stability are elevated.

Despite the forecast, President Hassan Rouhani’s chief of staff, Mohammad Nahavandian, said last week that the share of oil revenues in the next fiscal budget is defined in such way to ensure that the economy is least affected by the oil market fluctuations.

“The challenges posed by further drops in international oil prices for Iran’s economy will only be short-lived, whereas the countries that have plotted the slide in oil prices in the first place will receive a more severe blow,” he said.

He was echoing similar remarks made by other Iranian officials that the oil price fluctuation is a conspiracy orchestrated by the countries in the region and beyond to force Iran to compromise on its nuclear energy program.

 However, the report says that banks in the member countries of the (Persian) Gulf Cooperation Council are fundamentally stable, as governments continue with infrastructure programs. But it predicts a slight decline in liquidity in the countries’ banks due to a slowdown in deposits.