Iran sanctions relief will strengthen liquidity, economic growth: Moody’s

The International Atomic Energy Agency (IAEA) on Saturday confirmed that Iran had implemented the nuclear-related Joint Comprehensive Plan of Action measures agreed upon in July with the Permanent Members of the United Nations Security Council plus Germany.

 Moody’s, the international credit rating agency, says the implementation paves way for sanctions relief and is credit positive for Iran because access to previously frozen foreign assets will boost liquidity while sanctions relief will revive the economy.

The lifting of sanctions under the nuclear agreement will grant Iran access to as much as $150 billion in frozen foreign financial assets, which will boost liquidity and lead to a recovery of some bank nonperforming loans, which stood at 12 per cent of gross loans in 2015.

 Moody’s expects the removal of oil-related sanctions to result in an investment inflow, which will help revive the country’s ageing oil infrastructure.

Iran’s proven oil and gas reserves were approximately 382 billion barrels of oil equivalent in 2014, the highest globally, followed by Venezuela (Caa3 stable) and Saudi Arabia (Aa3 stable).

 Iranian officials expect to be able to increase oil output by about 500,000 barrels per day immediately after sanctions relief, and by another 500,000 by the end of the year. This increased oil production will contribute to higher growth next year, which will likely have positive spillover effects for the rest of the economy from higher investment and consumption spending.

According to the IMF, Iran’s real GDP will grow 4.0pc to 5.5pc in 2016 and 2017, largely owing to higher oil production.

Sanctions relief will also allow for the resumption of hydrocarbon exports and restore the country’s access to the international payment system, SWIFT, which will facilitate financial transactions.

The IMF estimates that Iran’s real GDP will grow by an additional 0.75-1.0 percentage points from lower trade and financial transaction costs alone.

Years’ of international isolation has left its oil and gas output below potential and its oil infrastructure in dire need of enhancements.

Iranian officials cite needing as much as $185 billion invested in the oil industry.

Iran’s oil production has been weak since 2011, accounting for only 4pc of global crude oil production, whereas gas production has increased steadily, reaching a 5pc share by year-end 2014.

In value terms, Iran accounted for 4pc of global exports of crude oil and petroleum products in 2011, exporting around 2.5 million barrels per day. After being cut off from the SWIFT international payments system, Iran’s export volumes (primarily to Asia Pacific countries not  participating in sanctions) fell to only 1.1 million barrels per day as of 2014.

Iran’s $417 billion economy is the second largest in the Middle East after Saudi Arabia, and is more diversified than other regional oil exporters, with oil and gas making up 17pc of GDP and oil revenues accounting for 30pc of total government revenues in
2014.

The country also benefits from a young, well-educated labour force and a large industrial base.

But economic mismanagement at home, including reducing interest rates and promoting greater bank lending amid already-high inflation, combined with increased international sanctions, culminated in a GDP contraction of 6.6pc and inflation averaging over 30pc in fiscal 2012 (ending 20 March 2013).

Since 2013, a combination of prudent policies and partial sanctions relief have led to a recovery, with real GDP growth at 4.3pc and inflation at around 16pc in fiscal 2014.