Economy, Business And Markets

Iran Macroeconomic Outlook

Iran Macroeconomic OutlookIran Macroeconomic Outlook

Tehran-based international financial services group Turquoise Partners periodically issues newsletters and factsheets about Iran’s economy, based on International Monetary Fund, World Bank and Central Bank of Iran data among others as well as in-house calculations.

The following is from the latest report published by the group’s research desk on the country’s macroeconomic outlook.

  GDP, Petroleum Sector & Growth Scenarios

The nominal GDP is estimated to reach $440 billion in 2018/19, making Iran the third largest economy in the region after Turkey and Saudi Arabia.

IMF projections show that in the short run, oil production recovery will be the most important factor underlying the real GDP growth of 4% in 2016/17 and that Iran will grow by an average 3.8% over the next three years.

Expansion in the crude oil sector is projected to push growth in the near term. Oil exports are forecast to rise by about 0.3 million barrels a day in 2017 and by a further 0.1 mb/d in the medium term.

Although the impact of lower prices will be partly mitigated by higher oil export volumes, there are limited prospects of a large increase in Iran’s oil revenue because of high global output and weak demand. Crude oil exports are expected to reach around 2.1 mb/d by 2017/18 and remain stable in 2018/19.

Gas production is predicted to remain stable at 2.8 mb/d between 2016 and 2017.

Two other optimistic and pessimistic scenarios come from senior macroeconomic strategists advising the government on economic policies. Tehran Chamber of Commerce, Industries, Mines and Agriculture held its fifth session of strategic economic meetings where senior macroeconomic advisors to the government were among the attendees of this event. The conference was part of TCCIMA’s plan to update corporate members on the latest economic outlook and analysis.

With regard to GDP projections in the coming year, two growth scenarios were considered:

1- 5% growth: 3% in the oil sector, 2% in other sectors: This scenario assumes that the oil sector will increase its role in the economy in early 2016—output has already reached 3 mb/d in March 2016. Oil is expected to play a major part in economic growth.

According to IMF’s forecast, increasing oil production will boost the oil’s share in GDP, which was previously under pressure during sanctions. In 2015, the oil sector registered a share of 9% in nominal GDP by comprising 54% of total exports (FOB prices).

2- Limited growth scenario: The trade of intermediate and capital goods, which constitutes 67.9% of Iran’s total trade account, declined by 22% and 19% respectively in 2015. Since there is typically a strong correlation between GDP growth and imports of intermediate materials and capital goods, limited expansion in real GDP is estimated in the year 2016/17.

Some analysts argue, however, that because a significant number of manufacturing plants are producing under capacity, there is room for growth that does not require capital expenditure.

Furthermore, sectors such as tourism, healthcare and, in general, services are expected to be key drivers of growth in 2016. These sectors do not correlate meaningfully with trade in intermediate goods.

Turquoise’s forecasts for the non-oil sector is to undergo a gradual transformation with regard to increasing overall efficiency in a post-sanctions environment.

Lower transaction costs and higher income per capita will stimulate consumption in the goods and services sectors, including the financial sector, in the short run.

  Consumption Share in GDP Expected to Change

In spite of sanctions, private consumption recorded a 17% annual growth in 2015/16. Total consumption expenditure for households (private consumption), which is the market value of all goods and services, including durable products (cars, washing machines and home computers), stood at 50% of nominal GDP as of the end of December 2015 for Iranian households.

Various studies suggest that an increase of general household expenditure is a likely scenario after sanctions removal. Consequently, analysts speculate that the Iranian economy will become the largest Fast Moving Consumer Goods market in the region over the next decade, comparable to countries like Turkey with 69% total consumption ratio to GDP.

The size of the FMCG market was estimated to stand at $2.6 billion before sanctions relief. The end of sanctions led to the release of Iran’s blocked assets while reducing the costs of foreign trade for Iranian traders estimated to amount to from a third to a half of the trading goods’ value (World Bank, 2015).

In addition, Iran is likely to receive an increase of foreign investment in the oil and gas sector fairly quickly; this will enable Iran to regain its extra one million barrels per day share of global oil supply that had been lost in previous years.

An increase in the government’s revenue will enable Iranian authorities to pursue investment and expansionary budgets that could boost consumption and improve general welfare of Iranian households.

Studies from Computable General Equilibrium models by World Bank suggest that general welfare will increase by 2.8% from sanctions removal.  Turquoise estimates private consumption to grow by an average of 10% annually to reach $237 billion in 2018/19.

Iran ranks in the range of upper quartile among Middle Eastern countries in the Human Development Index, a composite statistic of life expectancy, education and income per capita indicators.

IMF projects that GDP Per Capita, which includes indirect and direct government subsidies effecting purchasing power parity, to grow by 4% to 5% by 2018/19.