Economy, Business And Markets

Iran’s Sovereign Ratings Upgraded

Iran’s Sovereign  Ratings Upgraded
Iran’s Sovereign  Ratings Upgraded

Capital Intelligence (CI), the international credit rating agency, announced on Sunday that it has upgraded Iran’s Long-Term Foreign and Local Currency Ratings to ‘B+’ from ‘B’, and affirmed its Short-Term Foreign and Local Currency Ratings at ‘B’. At the same time, the Outlook for Iran’s ratings was revised to ‘Stable’ from ‘Positive’.

The upgrade reflects the progressive improvement in the external environment of the Islamic Republic of Iran and its positive impact on sovereign creditworthiness. Recently, both the Iranian Parliament and the US government endorsed the Joint Comprehensive Plan of Action, which was initially agreed in July in Vienna.

CI considers the latest developments as positive that pave the way for a gradual lifting of the economic sanctions imposed on Iran over the short to intermediate term.

 The nuclear agreement also paves the way for the release of frozen financial assets, the restoration of Iran’s access to cross border funding, and a significant improvement in trade and investment. Consequently, full implementation of the JCPOA agreed with the six world powers (five permanent members of the UN Security Council plus Germany) is expected to improve the country’s medium-term economic growth prospects and reduce sovereign risk.

Notwithstanding the latest improvement in the external environment, CI says there is implementation risk – albeit declining ? to the above prognosis, in view of the uncertainty surrounding the timeline for implementation.

It notes that the short to medium-term growth prospects for the Iranian economy have improved since the last review. Economic recovery is expected to gain momentum, with real GDP increasing by about 4% in FYE 2016 (following a 0.8 % growth in FYE 2015), and would likely expand by at least 4% in the medium-term if sanctions are eased. Inflation is expected to decline to 11.5% in FYE 2016, while the Iranian national currency, the rial, has also ended its two year streak of sharp depreciation.

Access Issues

Iran’s public debt remains low and official foreign assets remain sizeable, estimated by CI to be equivalent to around 15 months of imports of goods and services and around 10 times as high as external debt payments due in 2016, although there is some ambiguity regarding the liquidity and usability of these assets.

After a decade of surpluses, the central government budget posted deficits of increasing magnitude in FYE 2014 and FYE 2015, reaching about 2.9 % of GDP. Assuming a reversal of sanctions in the short to medium-term, CI expects the budget deficit to decline to an average of 1% of GDP during FYE 2016-2017.

Budgetary flexibility has remained low ? reflecting the reliance on the sanctioned oil sector, as well as rising current expenditure. The government intends to strengthen the budget structure and reduce the budget deficit by revising non-oil taxes, improving tax administration and pressing ahead with planned cuts in fuel and food subsidies.

Internal political risk factors have remained unchanged since CI’s last ratings review. However, geopolitical risk factors have increased during the past few months, reflecting the escalating conflict in neighboring Iraq, as well as in Syria and Yemen.