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Iran wins another credit upgrade

Azadi Monument, Tehran. Photo: Wikimedia Commons
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Azadi Monument, Tehran. Photo: Wikimedia Commons

Iran’s sovereign ratings have been upgraded by Capital Intelligence, the international credit rating agency. CI ratings, based in Cyprus, announced  23 January announced that it has upgraded Iran’s Long-Term Foreign and Local Currency Ratings to ‘BB-’ from ‘B+’, and affirmed its Short-Term Foreign and Local Currency Ratings at ‘B’. The Outlook for Iran’s ratings remains ‘Stable’.

CI said the upgrade reflects the recent lifting of international economic and financial sanctions related to the country’s nuclear programme. As a result, Iran will be able to utilise previously frozen external financial assets, export hydrocarbons, and re-access international financial and banking markets. The reversal of the sanctions is also expected to facilitate trade diversification and pave the way for much needed foreign investment to modernise the country’s infrastructure, thereby improving the country’s medium-term economic growth prospects.

CI expects the combination of higher oil production, lower costs for trade and financial transactions, and restored access to foreign assets to lift real GDP growth to about 4–5.5% in 2016, following a modest growth of 0.8% in 2015. Improved terms of trade and renewed access to foreign assets and capital should also enhance the stability of the exchange rate and possibly help stem the high inflation.

The public finances are expected to improve as well, albeit at a slower pace in view of the steep decline in oil prices since mid 2014 and amid fierce competition for market share, especially with GCC member states. Nevertheless, the government budget is expected to post a small deficit in 2016, and to register a small surplus of 0.5% of GDP in 2017, based on the assumption of average oil prices of USD35 a barrel and USD50 a barrel, respectively, in the aforementioned years.

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 falling due in 2016, although there is still some ambiguity regarding the liquidity and usability of these assets.

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 neighbouring Iraq, as well as in Syria and Yemen, and in addition to the escalating tension with the GCC member states in the wake of the execution of a Shiite cleric in Saudi Arabia.

Notwithstanding the above positive developments, Iran’s sovereign ratings remain constrained by the heavy reliance on oil (the price of which is currently below the break-even fiscal level), by the limited disclosure of data, and fundamental weaknesses in the economy, which have been aggravated by the long period of economic sanctions. The ratings are also constrained by continued expenditure rigidity as well as the weak financial system, institutional shortcomings and complex internal politics.

The Outlook for the ratings is ‘Stable’, CI said. This indicates that Iran’s sovereign ratings are likely to remain unchanged within the next 12 months provided that key metrics evolve as envisioned in CI’s baseline scenario and no other credit quality concerns arise.

The ‘Stable’ Outlook balances the projected positive outcome of lifting the sanctions against the prolonged period of low oil prices and the concerns of spillover from the conflict in neighbouring countries.

Author: Editor

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