Economy, Business And Markets

Iran’s Economic Strengths, Weaknesses

Iran’s Economic Strengths, WeaknessesIran’s Economic Strengths, Weaknesses

US-based media outlet KGOU’s World Views recently interviewed Iranian-American financial advisor, Hamid Biglari, on Iran’s economy after the lifting of nuclear sanctions.

Biglari serves as a managing partner at the TGG Group, a Manhattan-based financial advisory firm for Fortune 100 companies. He has also worked with Citibank.

Excerpts of the interview follow:

WORLD VIEW HOST: Let me begin by talking about Iran today. Explain to us why Iran is important.

BIGLARI: There are several reasons for Iran’s geopolitical and geoeconomic importance. The first is that it is the 18th largest economy in the world in terms of purchasing power parity. It’s on that basis about 1.4 trillion, which makes it about 8% the size of the US economy. It has a population of about 80 million people…

The second reason for Iran’s importance is it has a highly-educated population. One of the most interesting statistics on that front is that Iran puts out about the same number of engineering graduates every year as the United States–about 240,000, which puts it fourth in the world after India, China and the United States. And that is remarkable because all of these countries have many times the population of Iran. So it’s a population that is technically-savvy.

About two-thirds of the population are below the age of 35 and that population is extremely well-educated. They are Internet connected to the rest of the world, and it’s a great foundation to build.

The third reason for Iran’s importance is that it has the largest hydrocarbon reserves in the world. It has the fourth largest oil reserves in the world after Venezuela, Saudi Arabia and Canada. And it holds the largest gas reserves in the world.

And on a combined basis, there are very few economies that are balanced between both oil and gas. So, for example, Saudi Arabia has a lot of oil, very little gas, and Qatar has a lot of gas, very little oil. Iran is perhaps the only major energy-producing economy that is balanced across both.

And yet despite that, only about a quarter of the economy is based on oil and gas. And this is surprising because most resource-intensive economies have an economy that is much more heavily composed of energy.

So in the case of Saudi Arabia, about half the GDP is oil. In the case of Russia, it’s about 35 to 40%. So for Iran to be a quarter of the GDP means that it has a much more diversified economy than it would suggest. And that is despite the fact that it has been under sanctions and having to create a foundation without the benefit of lots of interaction with the world.

- Now that there is this nuclear deal and sanctions are lifted, investors are swarming and looking at Iran, what are they seeing? Those are the strengths. What are the weaknesses of Iran?

There are several weaknesses. The most important would be what one could characterize as rule of law. Investor protection, minority investor rights, contract and dispute resolution, those mechanisms are not sufficiently well-developed and they need to be much more developed before Iran can handle a significant amount of foreign direct investment.

Doing business in Iran is not easy and one needs to put that in context of other emerging markets. If you look at the various elements of what makes it difficult to do business in Iran, one of the most challenging is corruption … And then there’s the various elements of dispute resolution, how long it takes to register property...

And it’s a sign of the fact that it’s not truly a market economy. There’s a lot of state intrusion that needs to be changed.

…[Another] area where Iran has a lot of room to grow is capital allocation [that] is relatively inefficient. And that has to do with the fact that the banking system is not well-developed and for much of the previous administration—the Ahmadinejad administration—bank interest rates were set by the state and they were set at irrational levels to promote populist policies.

And so the nature of bank intermediations, which is to take money from savers and give it to borrowers, was broken because the rates weren’t set by market supply and demand. They were set by the state and that made it much more challenging.

As a result of which, there’s a large amount of non-performing loans that have accumulated because the financial intermediation has been broken for so long. And that needs to be fixed and Iran needs to have a more independent central bank that makes monetary decisions and regulatory issues.