Could Iran be the new financial services frontier? Is it the “new Turkey” for investors? Or still part of the “Axis of Evil”?
These were some of the questions addressed by Charles Robertson, Renaissance Capital’s global chief economist and head of the company’s macro-strategy unit, as he spoke to an international crowd of investment management professionals at the European Investment Conference on 26 November 2015.
Iran is on its way to becoming investable in the very near future — and much sooner than many would expect, Robertson said. With its well-diversified economy and population of 80 million — roughly that of Turkey’s — Iran would seem to be full of potential for investors.
So what are the opportunities and challenges when considering investments in Iran?
Opportunities: Demographics and Vast Resources
Robertson said Iran’s demographics are among its biggest assets. Roughly 80% to 90% of Iranian children are at secondary school, and the working population is expected to grow by 5% in the next five years. In comparison, for example, Russia’s population is expected to decline by 6%.
The average monthly wage in Iran is still below US$500, and GPD per capita is similar to that of Jamaica and Libya. It also has a wealth of natural resources, including 18% of the world’s gas reserves and the fourth-largest oil reserves in the world — approximately 10% of the global total. And based on its population, education levels, climate, and religion, Iran has much in common with Turkey.
Robertson noted that politically, Iran is slowly but surely moving forward, starting with the largely unexpected election victory of President Hassan Rouhani in 2013. Rouhani has been open to negotiations with the United States and has also started to reform the economy. European and US sanctions limiting oil exports started in 2012 due to the disputes over Iran’s nuclear program. The sanctions have had a visible effect on Iran’s economy, cutting total Iranian exports by at least a third and oil exports by even more. The sanctions also led to a rise in private sector debt, which at the moment stands at approximately 50%.
Sanctions to Be Lifted in January 2016?
Currently, most Western investors are prohibited from conducting financial transactions in Iran. Under US law, violations of the Iranian Transactions and Sanctions Regulations (i.e., most financial transactions with Iran) can lead to a fine of up to US$1 million and up to 20 years in prison. According to UK law, certain financial transactions in Iran can be punished by up to two years in prison as well as substantial fines.
In his presentation, Robertson noted that the sanctions may be lifted by January 2016. The removal or easing of the sanctions could open up a vast range of new investment opportunities in the country. Iran’s GDP could rise by 6% in 2016 if the sanctions were lifted, Robertson said, bringing approximately US$45 to US$50 billion of additional capital to the country in just one year. It is no wonder then, he observed, that the Iranian government is focusing so much of its efforts on having the sanctions lifted.
Iran is still difficult terrain for investors.
Whether the sanctions are eased or not depends in part on the elections to the Iranian Parliament and Assembly of Experts in February 2016. While Robertson expects reformists to win, the potential disqualification of certain candidates could complicate matters. Which and how many candidates will be excluded remains to be seen, but it could result in sanctions being reinstated, even if they are partially lifted in early 2016. The February 2016 elections may also have a spillover impact on the next Iranian presidential election, scheduled for 2017.
Another potential impediment: The government still controls much of the banking system, and historically, banks have not been allowed to fail. Just over 70% of the population has a bank account.
Stock market capitalization stands at approximately US$85 billion, but there are no foreign custodians in the country. In addition, Iran still operates under dual exchange rates: The unofficial rate in September 2015 was around 13% weaker than the official one. Robertson believes that the Central Bank of Iran will focus on unifying the two rates in 2016.
Iran’s legal system is also somewhat undeveloped, and in global corruption rankings, the country rates somewhere between Zambia and Lebanon.
More Predictability in 2016?
Iran is on a slow but steady path towards economic and political reform, much in the same way that Turkey was in 2002–2007, Robertson said. Nonetheless, the sanctions are still in place, and it is not certain when and to what extent they will be eased.
Thus, while Iran remains a fascinating country for intrepid frontier investors, some may want to wait and see how the political situation develops in the coming months. The more risk-averse investor may choose to wait for more predictability and stability to emerge later in 2016.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
Photo credit: Harry Richards