The international credit rating agency Capital Intelligence (CI) has revised the Outlook for Iran’s currency ratings to ‘stable’ from ‘negative’.
In a report published on Sunday, CI announced that it has affirmed Iran’s long-term and short-term foreign and local currency ratings of ‘B’.
The revision of the Outlook to ‘stable’ from ‘negative’ reflects the following factors:
* The improvement in the political climate –- including a modest decrease in external political risk –- in view of the interim agreement with the group of six world powers (known as the P5+1 group) in November 2013, and ongoing negotiations aimed at settling the nuclear dispute.
* Easing of some international sanctions, including the release of a limited amount of oil sale proceeds held in foreign accounts and the temporary cessation of international efforts to further reduce Iran’s oil exports.
CI’s expectation that the economy will begin to stabilize in the near term was supported by better macroeconomic management.
Political risk has decreased since CI’s last ratings review, albeit only slightly, following the appointment of a more reform-minded government and the reaching of an interim agreement with the P5+1 group. While it remains uncertain whether a long-term resolution of the nuclear issue will be reached, the resumption of negotiations is encouraging and the threat of a further tightening of sanctions in the near term has receded.
The interim agreement provides Iran with sanctions relief of around $7 billion (circa 2% of GDP) for the six-month period ending July 2014.
Under the agreement, no new nuclear-related sanctions will be imposed and Iran will be able to repatriate $4.2 billion of oil revenue currently held abroad, and maintain oil sales at around 1 million barrels per day.
Sanctions on Iran’s petrochemical exports, the automobile industry, and on the trading of gold and precious metals have been suspended, potentially providing around $1.5 billion in revenue.
However, the interim agreement maintains sanctions against the Central Bank of Iran and other domestic financial institutions.
In the domestic arena, macroeconomic management is beginning to improve under the new government appointed last August. The Iranian rial (IRR) has stabilized over the past six months after having depreciated substantially over the previous two years, while inflation – which had exceeded 30% in the fiscal year ending in March 2013 — is on a downward trajectory and is projected to decline to 20% in the fiscal year ending in 2016.
In addition, the pace of contraction in the real economy has slowed and the economy is projected to return to growth in the fiscal year ending in 2015, albeit at a modest rate.
Public debt remains low and official foreign assets remain sizeable, estimated by CI to be equivalent to almost 18 months of imports of goods and services, and around ten times as high as external debt payments falling due in 2013. However, the country’s capacity to absorb external economic shocks is weaker than the headline metrics suggest.
In particular, Iran’s ability to access and use its foreign assets is seriously constrained by international sanctions, and the size of liquid and freely-usable foreign assets is unknown.
Fiscal performance has weakened in recent years, although from a position of relative strength. After a decade of budget surpluses, the central government’s fiscal position posted deficits of increasing magnitude in the fiscal year ending in 2013 and the fiscal year ending in 2014, as tougher international sanctions cut into oil revenues.
The central government budget deficit is expected to be around 2.5% of GDP in the fiscal year ending in 2015, compared to 2.2% of GDP in the fiscal year ending in 2014. Budgetary flexibility has declined, reflecting the reliance on an oil sector hampered by sanctions 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.
Nevertheless, a substantial improvement in fiscal outturns appears unlikely while sanctions are in place and the domestic economy remains weak.
The Outlook for the ratings is ‘stable’. This indicates that Iran’s sovereign ratings could remain unchanged within the next 12 months, provided that key metrics evolve as envisioned in the CI’s baseline scenario and no other credit quality concerns arise.
The ‘stable’ Outlook reflects CI’s expectation that political risk will remain broadly unchanged in the short-term at least, while economic management will improve. The Outlook also balances budgetary and socio-economic challenges against the low level of public debt and the government’s net creditor position.