IRAN The Road Ahead Ahmad Azizi March 2016 Iran The road ahead - PowerPoint PPT Presentation

IRAN The Road Ahead Ahmad Azizi – March 2016

Iran – The road ahead • Why Iran? • Economy • Market Prospects • Foreign Investment • Challenges • Banking • Future Plans - GDP target & financial sector reform • JCPOA • … take away message

Why Iran? – Strategic & Stable Partner • 18 th largest economy (GDP – PPP - £1’400b source: IBRD ) • Diversified economy (oil only 15% , Service 53% of GDP) • GDP growth 3% year ending March 2015 • Resource rich, Fossil fuel (Oil & Gas combined) - alterna[ve to Russia • Strong infrastructure (need for modernisa[on) • Market size, High GDP growth poten[als • Young, educated & welcoming popula[on of 79m • Highly-skilled labor force • Priva[sa[on & deregula[on plans

Economy • Recent Performance; • GDP growth 3% • Infla[on: CPI Feb 2016, 12.6% / PTP 9.6% (June 2014 = 45.1%) PPI Feb 2016, 5.5% / PTP 3.4% • Currency stability • 11% reduc[on of interbank market rate (29% to 18%) • TSE Index growth • Unemployment 10.7% • Liquidity growth 18.3% (as at Dec 2015 – 9 months) • Monetary base 8.9% (as at Dec 2015 – 9 months) • Money mul[plier: 6.4 (8.6% increase - Q3) • Net foreign assets of CBI +16.9%

Economy - Continued • Strategic loca[on, 16 neighbors, land and see access • Very low foreign debt & Low government debt • Impeccable payment track record despite revolu[on, war, sanc[ons etc. • Historical surplus in all sec[ons of BOP • Sizeable, historically capable banking sector with interna[onal experience • Government support for banking sector • Re-emergence aper liping of Sanc[ons (market poten[als) • Stable in a turbulent region • Vibrant and peaceful society (mul[-ethnicity) • Elec[ons, etc

Economy: Positive Prospects • EIU Projec[on: % 2016 2017 2018 2019 2020 GDP 4.5 5.4 5.2 5.1 5.5 • Major Analysts are forecas[ng considerable GDP growth for 2016: FT Economist World Bank IMF IRAN 4.1 4.5 5.8 5.5 WORLD 2.8 2.7 2.8 3.4

Economy: Positive Trends • Recovery (GDP growth of 2015 – Y/E March 2015) • Monetary and fiscal discipline • Reduc[on of Infla[on • Stability of FX market • Market stability – Infla[onary Expecta[on Management • Change in the composi[on of liquidity (indigenous) • Reduc[on of interbank rate (from 29% to 19%) • Planning currency unifica[on, countercyclical policies (debt & tax)

Foreign Investment, FIPPA • Sovereign guarantee (FIPPA) • Repatria[on guarantee • Equal treatment with local investors • Interna[onal arbitra[on, courts • Need for : • Ra[ng • Currency Unifica[on & hedging instruments (IRR-EUR NDF is quoted) • local financial system interac[on with Int. Fin. Markets • More transparency, IFRS,

Foreign Investment Tax • Flat corpora[on tax of 25% • No dis[nc[on between Foreign & Local firms • Personal tax maximum 35% • VAT 9% • Very low tax burden 9% GDP (France 44%)

Economic Challenges 1. Low oil prices (makes FX a poli[cal economy considera[on) 2. Overcoming years of disconnectedness, Remaining Sanc[ons, etc 3. Structural reforms; including financial sector reform (credit crunch, shadow banking, NPL, low capital adequacy, capital market, Gov debt, correspondent banking, regula[on and supervision, resolu[on regimes, etc) 4. Business environment; Governance, Legal system reform, Transparency, An[ corrup[on 5. Policy credibility, produc[vity, priva[sa[on,

Economic Challenges 6. Financial markets are not well integrated into world market 7. Nominal exchange rate (ER) as historical anchor of monetary policy 8. Failed nominal ER , pro-cyclical fiscal & credit policy: RER apprecia[on, Dutch Disease & tradable output contrac[on 9. FX parity , specula[ve asacks, lack of hedging instrument 10.Debt Market Development 11. Bad Bank V Good Bank 12. Profit (Interest) rates, Infla[onary expecta[on & Monetary discipline

Economic Challenges– weak recovery

Sectoral Growth Rate 2000-2014

Economy: Challenges

Economy: Challenges

Banking – Balance sheet summary Loans Assets Deposits Liabili[es Government owned 3 17% 17% 19% 17% Specialised Banks 5 26% 21% 13% 21% De-na[onalised Banks 4 34% 33% 34% 32% Private Banks 18 22% 27% 32% 27% Credit Ins[tu[on 2 1% 2% 2% 2% Total 32 100% 100% 100% 100%

Banking • Past ten years; 2004 2012 2015 NPL 7.2% 14.7% 12.8% CAPITAL ADEQUACY 13.1% 9.6% 7.6% Government Debt to Banks / Total assets 2.4% 6% 6.8% Banks’ debt to CBI / Total asset 1.6% 6% 5.2% • Sanc[ons impact: • Technology & Know how deficits • Higher transac[on costs • IFRS, Compliance, Banks’ health indices • Governance, regulatory and supervisory standards

Banking ( continued ) • Financial suppression • Government debt to Banks • Mandatory facili[es & Mandatory rescheduling • Mandatory Interest rates • Investments in real market: Projects & property market • Resulted in Credit and liquidity crunch • Fairly developed payment systems

Banking ( continued ) • Beser environment since 2013 • Posi[ve real rate returns on deposits • Monetary & fiscal discipline • Reduc[on of CBI reserve requirement • QE Plan encouraging consumer borrowing • Improved liquidity posi[on resul[ng from JCPOA

Future Plan - GDP Target & Financial Sector Reforms • GDP target growth 8% for 2016 to 2020 • Enabling, providing and consistent enforcement of business laws • Strengthen CBI to maintain monetary & financial stability, financial development, strong regula[on and supervision • Reform corporate governance, including IFRS • Exchange unifica[on • Financial safety net, including: Deposit protec[on, Credit bureau, ra[ng agency etc • Debt market reform • Promo[ng FDI • Integra[ng with the global financial system

JCPOA • Landmark deal entails full termina[on of all Nuclear Related sanc[ons; trust building process, momentum to cooperate • P5+1 Commitments (sec28): Good faith and construc[ve atmosphere • Refrain from any ac[on inconsistent with the leser, spirit & intent of JCPOA • Make every effort to support successful implementa[on • Normalisa[on of trade and economic rela[ons (Sec[on 29-EU) • Ensure access in areas of trade, technology, finance and energy • Facilitate trade, project financing and investment in Iran

JCPOA (continued) • Liping of sanc[os is comprehensive (annex 5) • Consulta[on with Iran in draping the JCPOA Guidelines • Snap back would not apply retroac[vely • Problems: Remaining USA sanc[ons (mainly primary) • US$ • SDN list • US firms prohibited but their subsidiaries may be allowed • Implementa[on risk; Snap-back V Huge investment by par[es • Result: Availability of Correspondent banking services, star[ng point

JCPOA – Challenges & risks • Slow provision of correspondent banking services • Poli[cal maneuvering e.g. US congress … • DPAs (deferred prosecu[on agreement) • Fines & fear of USA Government • Ongoing inves[ga[ons • Extraterritoriality in applica[on of American laws • Guidelines (not effec[ve reflec[on of commitments made under JCPOA) • FATF statement on Iran • Snap-back, Dual use, US components • JCPOA – Major breakthrough but not enough

JCPOA – Challenges & risks • High cost of compliance & cost of failures (Fines – US & EU enforcement) • Slow provision of correspondent banking services-CBS (Threat of loss of CBS) • Poli[cal maneuvering e.g. US congress … • Terms of DPAs (deferred prosecu[on agreement) • Fines & fear of USA Government / Ongoing inves[ga[ons • Dollarisa[on (conversion etc) • Extraterritoriality in applica[on of American laws • Guidelines (not effec[ve reflec[on of commitments made under JCPOA) • FATF statement on Iran • Snap-back, Dual use, US components • JCPOA – Major breakthrough but not enough

JCPOA - Upsets • Dr Zarif: USA should act to remove psychological barriers • Minister of Agriculture: I feel sorry when I see our foreign counterparts are only aper selling their products

… message • East or West • East is coming with packages of billions of finance • Some in the west are more enthusias[c than others • Iran is a rear opportunity with huge poten[al • Removal of sanc[ons are good but not enough • More to be done by US & EU to ensure delivery of JCPOA promises • Need for structural reform to ensure higher growth trajectory • Expecta[on Gap/management: • Strong infrastructure is available for higher growth

… quotes on Iran • EIU: No market in the world has the same level of untapped poten[al • Federica Mogherini: The EU should strive to create a broader network of key actors in the Middle East including Iran

Iran – The road ahead Thank you