Iran update: Assessing the current market environment

Transcription

1 Iran update: Assessing the current market environment Dr. Vedat Mizrahi 21 March ÜNLÜ & Co Özel ve gizlidir

2 Table of Contents 1 Section Page I. Political scene a year after the nuclear agreement 03 II. State of the Iranian economy and foreign direct investment 07 III. Appendix 15

3 I. Political scene a year after the nuclear agreement

4 Will the Nuclear Deal with Iran begin to unravel? 3 Renewed external uncertainty Uncertainties on how the Trump Administration will handle the Iran Nuclear Deal On one hand, President Trump has been harshly critical of the deal, which he called the worst deal I have ever seen negotiated. On the other hand, the U.S. has limited options outside the deal. The status quo is no longer available; UN and EU sanctions have been limited and are unlikely to be re imposed. It would be hard for the U.S. to restore the level of economic pressure on Iran that persuaded Iran to negotiate in the first place. Russia, with whom the Trump Administration has promised to work more closely, will certainly encourage the U.S. to stay within the deal. The U.S. and Iran will continue to test each other Iran has continued a series of ballistic missile tests, which U.S. officials believe to be a violation of the terms of the Joint Comprehensive Plan of Action (JCPOA). The U.S. has responded by imposing new sanctions on 25 individuals and entities involved in the ballistic missile program, some of whom are based in China, the UAE and Lebanon after Iran carried out a missile test on 29 January These new sanctions are symbolic and their impact is limited. Most of the Iranian entities and individuals being targeted do not have US assets that can be frozen.

5 New sanctions may not be enforced 4 New sanctions by the US will not be effective without the participation of Europe, China and Russia There is substantial pressure in Congress for tighter non nuclear sanctions on Iran The new US administration may reinstate UN sanctions by invoking the snapback provisions in the Iran deal, but this would be very risky. Other UN members (particularly the EU, China, and Russia) might not enforce the sanctions, and Iran would almost certainly take the opportunity to walk away from its obligations under the deal. For the EU, the nuclear deal is considered the best alternative to either a war between Iran and Israel, or an Iranian nuclear bomb. The EU would only agree on new sanctions if Iran fails to comply with the nuclear deal. A friendly US Russia relationship could mitigate the risk of an escalation in tensions between Iran and the United States, given that the Russians could act as a mediator. If the nuclear deal is undermined it would strengthen the position of hardliners, including the elite Revolutionary Guard, and damage Rouhani s prospects of being reelected in May Such an outcome would make the regional conflicts more entrenched and raise the risk of war with Israel. Recently, the Iranian Parliament has asked the government to resume enrichment of uranium if the US tries to renegotiate the nuclear deal. Ultimately, the new US administration may find the deal hard to unwind.

6 Power struggle in Iran 5 The political scene in Iran is polarized Iran prepares for Presidential Elections in May 2017 The power struggle between pro reform forces and regime hardliners (including the Revolutionary Guard, the Judiciary and Conservative Clerics) is expected to intensify Current President Rouhani is seeking to be re elected The death of Rafsanjani (the former President, and a key ally of Rouhani) may complicate the current power struggle A period of more radical foreign policy may be in the cards Hardliners are yet to decide on their consensus Presidential candidate Rouhani is being critized for failing to promote domestic investment following the lifting of economic sanctions in early 2016 Nonetheless, Rouhani is in a strong position to be re elected for a second four year term as he has managed to unite reformist and moderate conservative fractions to support his economic reform agenda

7 II. State of the Iranian economy and foreign direct investment

8 Foreign banks still cautious 7 US maintains economic pressure on Iran International banks are still cautious about doing business in Iran, US dollar clearing restrictions have not been lifted and continue to pose a major challenge for global banks to re establish correspondent banking relations This in turn restricts access to corpoate trade and primary sanctions remain in place In addition to maintaining a broad domestic trade embargo prohibiting most transactions between US individuals and Iranian entities, the US also retained sanctions on Iranian entities connected to terrorism financing, human rights abuses and the ballistic missile program., Foreign firms may be subject to US secondary sanctions for facilitating financial transactions with designated Iranian institutions....in part because the US still retains extensive sanctions against Iran The US Department of Treasury took some action in Fall 2016 to alleviate foreign bank concerns by issuing guidance that US banks can do dollar trades with Iran, provided that they do not pass through a US institution. However, following the elections in the US, there is strong support in the Congress and in the new Administration for maintaining economic pressure on Iran. In late 2016, the Congress passed a 10 year extension of the Iran Sanctions Act, which provided the framework for secondary sanctions.

9 Limited progress in economic reforms 8 Risks to the outlook beyond near term are significant Structural economic reforms are necessary to achieve sustained growth and to reduce the unemployment rate Business environment needs to be improved in additionto maintaining political stability and better relations with the international community The country suffers from large infrastructure deficiencies: Its oil fields have been crippled as sanctions kept needed equipment and machinery out of the country The energy sector alone requires at least USD100bn in the next five years to make up for the under investment in the past decade Business discrimination, legal uncertainties and widespread corruption hinder a strong recovery in investment Iran ranks 76th out of 138 by the World Economic Forum (WEF) in terms of competitiveness Some priority measures that could address these challenges include streamlining business regulations and an affirmation of investor rights. Financial market development and labor market efficiency are other areas that need to be tackled. International trade integration would complement the reforms in boosting lagging productivity.

10 Banking system is fragile 9 Iranian banking sector needs to consolidate and to be recapitalised Fragile domestic banking system, continued difficulties in reconnecting to the global financial system and hurdles to reform the regulatory system have held back major long term commitments to invest Continued public payment arrears, related party lending and poor management of the banking system has weakened the balance sheets of the banks Iranian banks need large capital injection, management restructuring and governance improvements Poor management and sanctions over the past few years have led to a sharp increase in non performing loans (NPLs), which reached 12% of total loans in 2016, well above the GCC average of 3% The capital adequacy ratio has continued to deteriorate from 8.5% in 2012 to slightly less than 6% in 2016 Profitability remains constrained by the high cost of funding High NPLs and tight cash flows in the financial and corporate sectors continue to undermine domestic investment Iranian bankers are also frustrated at the slow progress in finding European banks to handle international payments for them In July 2016, the Central Bank of Iran cut the lending rate following private banks move to lower the one year deposit rate from 18% to 15% Further cuts in the lending rates are unlikely given the high NPLs and the recent up tick in the CPI inflation rate to 9.6% in January 2017.

11 IMF Report on Iran 10 IMF concludes 2016 Article IV Consultation with the Islamic Republic of Iran on 27 February In its recent report, IMF emphasizes the importance of Maintaining prudent economic policies and building buffers Strengthening the financial sector through Enhanced supervision of distressed banks Asset quality review to identify viable banks that warrant recapitalisation Advancing reforms to lessen Iran s reliance on oil, while using oil revenues to fund bank recapitalisation Develop private sector Implement a medium term fiscal framework to underpin their commitment to prudent fiscal policy IMF welcomes recent steps to Strengthen the AML/CFT framework Introduction of IFRS reporting in banks Audit and securitization of government arrears Underscores the authorities commitment to unify the exchange rate and shift to a managed float by early 2018 IMF projects GDP growth to stabilise at 4.5% in the medium term as the recovery broadens Real GDP growth is expected to reach 6.6% in 2016/17 and to ease to 3.3% in 2017/18 as oil production remains at the OPEC target

12 Business Activity Overview 11 Automotive The production line of a newly formed joint venture between Volkswagen and the Iranian automotive company Mammut Khodro will be launched by the end of the current Iranian fiscal year that ends in March The first CVT transmission manufacturing factory named 'Qova Moharekeh Punch Powertrain Iran' was inaugurated in Zanjan (northwestern Iran), in a partnership deal between the Belgian firm, Punch Powertrain and the Industrial Development and Renovation Organization (IDRO). The project will be executed in three phases. In the first phase Punch Powertrain will invest USD27.5mn in the plant. Scania has signed an agreement in principle with the Iranian province of Isfahan and Shahr e Atiyeh Investment Company on the delivery of 1,350 buses for public transport for Isfahan and four other Iranian cities. The first of these new buses will be in operation at the end of Aviation Tehran has reached a deal with an international aircraft leasing company to finance the acquisition of 77 planes from Boeing and Airbus. Under a finalized deal valued at $400 million for 20 passenger planes, French Italian aircraft manufacturer ATR will deliver three or four passenger planes to Iran Air by March 20. The first Brazilian Embraer airplane joined Iran's air fleet. Four additional Embraer 195 planes will be added to the aviation fleet by March 20. Russian Energy Minister Alexander Novak announced that Iran has confirmed its intention to buy 12 Russian made Sukhoi Superjet 100 in the near future. French construction company Vinci SA has signed a Memorandum of Understanding (MoU) for the development of Mashhad International Airport.

13 Business Activity Overview 12 Oil & Gas According to a top National Iranian Oil Company (NIOC) official, Total has officially started the development of Phase 11 of Iran's South Pars natural gas zone, a major project which it will develop together with Iran's Petropars and China's CNPC. The three signed a Heads of Agreement (HOA) with the NIOC last November to invest USD4.8bn in the project. Germany's BASF is in talks with Iran on possible investment in the country's oil and gas sector. Chief Executive Kurt Bock said that such talks were limited to investments in oil and gas exploration and production and did not extend to downstream petrochemical processing plants. China s Wuhan Company has signed a Memorandum of Understanding (MoU) to invest USD3.6bn in Iran s Masjed Soleiman Petrochemical Industries Company. Total is reportedly in talks to buy a multi billion dollar stake in Iran's partly built liquefied natural gas (LNG) export facility, Iran LNG. The French oil major, the first of its peers to strike deals in Iran after sanctions, is seeking entry into Iran LNG at a discount to the pre sanctions price in exchange for reviving the stalled project. Malaysia's Bukhary International Ventures (BIV) and the National Iranian Oil Company (NIOC) have signed a MoU for carrying out studies over Iran's Golshan and Ferdowsi fields. Tehran and Muscat have signed a preliminary agreement for a major offshore pipeline project to supply Iranian natural gas to Oman, with Total S.A., Royal Dutch Shell, Uniper SE, Mitsui and Korea Gas Corporation top in line to implement the project. The pipeline will not cross the United Arab Emirates (UAE).

14 Business Activity Overview 13 Energy Turkish energy company Unit International's USD4.2bn preliminary deal with the Energy Ministry in June to build gas power plants in seven regions with a total output capacity of 6,000 MW has been cut down to one third. Under the revised deal, the Turkish company will initially just construct two combined cycle power plants. Russia and Iran have begun the construction of a 1.4 GW thermal power plant in the city of Bandar Abbas in southern Iran. Hospitality The Dubai based hotel firm Ramee Group is eying an entry into the Iranian tourism market. The Group s Director of Operations in India, Nihit Retail Srivastava, has said Iran is among the new markets that Ramee is watching closely. Turkish discount retailer BIM Birlesik Magazalar (BIM) is exploring opportunities for possible opening of stores in Iran. The supplier of basic food items and consumer goods says it is about to be granted authorization to initiate marketing research studies to determine opportunities and investment potential in Iran s retail market. Steel Japan's Sojitz Corporation, has signed a preliminary agreement to study the production of steel sheets in Iran's southeastern port of Chabahar in Sistan Baluchestan Province. The agreement is to be implemented under a credit line of $10 billion that Japan has allocated to Iran..

15 III. Appendix

16 Middle Income Country 15 Iran is a middle income country with GDP (PPP) of USD1.46bn and per capita PPP of USD18,136. GDP grew 330% and per capita GDP has more than doubled since the 1979 revolution. Poverty has been virtually eradicated, with only 2% of the population living on less than USD1.0/day. Per Capita GDP (PPP, 2016) Source: IMF, World Economic Outlook

17 Modern Infrastructure 16 Iran has a fairly modern infrastructure, including ports, domestic airports, roads and communications infrastructure. However, infrastructure built with Western help in the 1690s and 1970s is aging and in need of capital investment. (2) Source: The World Bank

18 Higher Education 17 Higher Education Rates Scientific and Technical Education Rates Source: UNESCO

19 Largest Hydrocarbon Reserves in the World billion barrels of proven oil reserves 34 trillion cubic meters of proven natural gas reserves Crude extraction costs are among the lowest in the world at US$ per barrel Only country with access to both Persian Gulf and the Caspian Sea hydrocarbons basins Proved Crude Oil and Natural Gas Reserves (2013) Source: BP Statistical Review of World Energy 2013

20 The Iranian Economy at a Glance / / /18 Population (Million) GDP PPP (Billion of current international dollars) 1,380 1,460 1,550 GDP Growth (%) 0.4% 6.6% 3.5% Per Capita GDP (PPP) Current international dollars per capita 17,350 18,136 19,050 Gross Government Debt (as a % of GDP) 15.9% 14.9% 15.0% Gross Government Net Debt (as a % of GDP) 1.7% 1.1% 1.0% Gross National Saving (as a % of GDP) 31.6% 33.0% 31.9% Inflation (average consumer prices, annual percent change) 11.9% 7.4% 7.2% Inflation (end of period consumer prices, annual percent change) 8.3% 8.0% 6.5% Unemployment 10.8% 11.3% 11.2% Source: IMF

21 Major Oil Producer Despite Sanctions 20 Iran produces 3.6 million barrels of crude oil per day and could easily rebound to pre sanctions production levels of 4 million barrels per day. Iran s target is 5.7 million barrels per day of crude oil production by Iran exports 2.5 million barrels of crude oil per day which is equivalent to its pre sanctions export levels Iran is one of the few countries with the technical ability to perform deep water drilling. Iran is well placed for exporting crude oil and has an excellent pipeline and port infrastructure.

22 Diversified Economy 21 57% of Iranian exports are non oil and gas. During the tightening of sanctions, the non oil sector reached a historic 90% share of GDP as Iran was forced to diversify its economy. This helped Iran to manage the transition to lower oil prices, which proved a greater challenge for many other oil exporters. Under advice from the IMF, the government has been successful in implementing more stringent disciplinary measures supporting tax collection. New tax measures and greater supervisory controls are helping prevention of tax evasion. * Oil and Gas sector industries crude oil and condensate excluding petrochemical products

23 Not just about oil A Major Metals Producer 22 Iran s main copper and iron ore deposits are in Yazd and Kerman, with good access to infrastructure and ports. Much of the mining sector has been privatized and there is a need for mining technology and investment. In Cement chromite Iron Ore Zinc Copper Lead Iran is the 4th largest producer 9th largest producer 10th largest producer 15th largest producer 17th largest producer 23th largest producer

24 Established Manufacturing & Industry Capabilities 23 Iran is the largest car producer in the Middle East, production 1.6 million cars in 2011 the year before the Iranian auto sector was placed under sanctions. Iran has one of the largest construction industries in the region and is a major producer of cement, steel and petrochemicals. Last year Iran exported billion 2.3 US$ OF technical and engineering services with a growth of 40% y o y in Q1 of this year. Photo: Production at Iran Khodro, the largest car producer, rose 133% in April august 2015, year on year, mainly due to an easing of trade sanctions. Source: Irankhodro, Trade Promotion Organization of Iran

25 Virtually Debt-Free 24 Iran s gross government debt is 14.9% of GDP and net debt is 1.1% of GDP. Central Bank reserves are over billion 100US$. Gross national savings is 33.0%, behind only China. General Government Gross Debt (% GDP) Gross National Saving (% GDP) Source: IMF, World Bank

26 Middle Class Population Increasing 25 Per Capita GDP (PPP) Percentage of Population Living in Poverty Source: IMF, World Bank

27 The Potential of Iran: Ambitious Reforms Underway 26 The reform program is intended to lower inflation, expand employment and increase trade Policies include deregulation, tax reform, monetary discipline and privatization The IMF endorsed the reform agenda after a February 2014 visit to Iran Structural Reforms Timeline Source: Turquoise Partners

28 Privatization 27 Iran has been privatizing state owned assets since A total of billion 119 US$ in state assets is privatized since 2006, including 15 of Iran s 30 largest companies. The target is to reduce state ownership from 75% to 20% of the economy by Privatization under former President Ahmadinejad transferred substantial assets to state entities such as the Social Security Fund and to wellconnected «foundations»(bonyads). These shares are now returning to the market. President Rouhani has ordered quasi state organizations and bonyads to limit themselves to activities that do not compete with the private sector (such as charity and development work). Before privatization 10 Year Target State 75% Private 20% Mandatory Implementation State 20% Private 55% Co op 5% Co op 25% Source: Privatization Organization of Iran The Privatization Program is often referred as The Article 44 Program referring to Article 44 of the Constitution which permits multiple forms of ownership

29 Tehran Stock Exchange & Iran Farabourse 28 Tehran Stock Exchange (TSE) was founded in 1967 TSE has high standards for listing companies and rates listed companies for their corporate governance performance Dividends and capital gains are tax exempt for domestic and foreign investors Tehran Stock Exchange Market Capitalization USD 103 Billion As of Dec 2016 Free Float 21% As of August 2016 Listed Companies 320 As of Dec 2016 Average Daily Trading Volume USD 54 Million As of Dec 2016 Member Brokerage 108 As of Dec 2016 Clearing and settlement is book entry and T+3. All clearing andsettlement is handled by the Central Depository of Iran Iran Farabourse A new trading system has been introduced resulting in no failed trades, faster trades, real time data, and online trading Daily price fluctuations are limited to +/ 5% New products being introduced, such as commodities and financial derivatives (futures contracts for gold coins and stocks), With promise of more to come Market Capitalization USD 25Million As of 19 Jan 2016 Free Float 22% As of August 2016 Listed Companies 145 As of 21 Oct 2016 Average Daily Trading Volume USD 25Million As of 19 Jan 2016 *Converted at the market rate of 39,400 **Average daily trading over last 9 months (March Dec 2016). Source: TSE, Farabourse

30 Fundamental Ratio Comparison 29 Country P/E P/B Dividend Yield (%) Iran Kuwait MSCI Emerging Markets Qatar MSCI Egypt MSCI Frontier Markets Saudi Arabia UAE Oman MSCI Turkey Source: MSCI, Kamcoonline, TSE, All data are as of ending December 2016

31 Structure of the Capital Market 30 High Level Policy Supreme Council of the Exchange Minister of Economics, Minister of Trade, Governor of the Central Bank, Attorney General, Chairman of the SEO, representatives of active market participants, 3 experts Regulation and Supervision Securities and Exchange Organization Appointed by the Supreme Council of the Exchange Markets Tehran Stock Exchange Farabourse (OTC Market) Mercantile Exchange Clearing, Settlement, Custody Central Depository Members Brokerage Houses Source: TSE

32 Composition of Market by Sector 31 Sector Composition Chemical & By Products %20.9 Monetary Intermediation %11.2 Basic Metals %9.5 Telecommunication %8.0 Diversified Industrial (Holdings) %6.9 Refined Petroleum Products %6.3 Metal Ores Mining %5.5 Motor Vehicles and Auto Pars %5.3 Sector Composition Iran %4.0 Kuwait %2.9 MSCI Emerging Markets %2.7 Qatar %2.7 MSCI Egypt %2.3 MSCI Frontier Markets %2.1 Saudi Arabia %1.9 UAE %1.3 Source: TSE

33 Top 20 Listed Companies by Market Cap 32 No Name Company 1 Persian Gulf Petrochemical 2 Mobile Telecommunication Company of Iran 3 Telecommunication Company of Iran 4 Mobarakeh Steel Co. 5 Ghadir Investment Holding 6 National Iranian Copper Industries Co. 7 Jam Petrochemical Co. 8 Persian Oil and Gas Development Group Co. 9 Tamin Petrochemical 10 Golgohar Mining & Industrial Co. 11 Islamic Republic of Iran Shipping Lines 12 Bandar Abbas Oil Refinery 13 Mobin Petrochemical 14 Esfahan oil Refining Co. 15 Omid Invetment Group Corporation 16 Informatics Services Corporation 17 Chadormalu mining & industrial Co. 18 Pardis Petrochemical 19 Khuzestan Steel Company 20 Civil Servants Pension Organization Source: TSE