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UNDERSTANDING IRAN: POST SANCTIONS INVESTMENT IN A
POST- ELECTIONS ENVIRONMENT
Dr Bijan Khajehpour Lead Editor, Iran Strategic Focus
@MenasAssociates 03 March 2016
Iran is at a very significant juncture of her political development.
The 26 February twin elections had one key message:
The Iranian people want to break away from the hardline forces that have dominated Iranian politics for two decades.
» The elimination of figures such as Ayatollahs Mohammad Yazdi, Medbah Yazdi, former Majles Speaker Haddad Adel and the embarrassing result for Ayatollah Jannati all have one central message: Iranian society is endorsing the political discourse of Hashemi Rafsanjani and President Rohani
» The endorsement of President Rohani can also be seen as an approval of the nuclear deal and the overall emphasis on economic development
Understanding Iran: Post-Elections Environment – 3 March 2016
» So far, the Iranian economy has benefited from the psychological and financial impacts of the lifting of sanctions and over the course of the next years, the economic impulse will also be a significant driver for economic development
» The re-entry of international banks and investors may emerge at a slower pace than the government had hoped
» In this briefing, we will discuss the impact of the recent elections and the overall political and economic outlook
Understanding Iran: Post-Elections Environment – 3 March 2016
» The Iranian power structure consists of parallel Islamic and democratic institutions with a lot of checks and balances
» Most strategic decisions are made in Councils where all factions exert influence
» There is an ongoing bargaining process between networks of power
The elections on 26 February 2016 have radically changed the factional compositions of these two entities.
Understanding Iran: Post-Elections Environment – 3 March 2016
» All 30 seats in Tehran went to reformist and moderate candidates
» The electorate has unsettled the political scene by eliminating some of the most significant icons of the hardline political establishment in Iran, including:
Current Speaker of the Assembly of Experts and former Head of
Judiciary, Ayatollah
Mohammad Yazdi
Leading Member of the Assembly of
Experts and Ahmadinejad’s
mentor, Ayatollah Mesbah
Yazdi
Former Speaker of Majles and Top Conservative Candidate,
Gholamali Haddad Adel
Understanding Iran: Post-Elections Environment – 3 March 2016
» In the 3 Majles elections before
2016, voter turnout had been below
the overall average (see chart)
» The Iranian society was relatively
enthusiastic about these elections
and voter turnout was about 62%
» Analysts agree that voter turnouts
above 55% give an edge to the
more moderate political forces
Calculated by using the official number of participants divided by total eligible voters (source: Ministry of Interior)
52
65
60 58
71
67
51
55 55
62
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
Voter Turnout (%)
Understanding Iran: Post-Elections Environment – 3 March 2016
» The original number of applicants (12,231) and the calls for participation in the elections indicated that all political factions decided to participate in these polls
» The Guardian Council’s (GC) conduct in rejecting reformist and moderate candidates was heavily criticised, but it did not stop the more moderate forces from pushing their agenda and competing for votes
» The hardliners associated with former president Ahmadinejad’s camp have lost most of their seats and will represent a minority faction in the next Majles. Consequently, the next Majles will be more aligned with the moderate forces in the Rohani government
» Based on our projections, the next Majles will be split as follows:
• 35% - Reformists / Moderates;
• 35% - Independents (mainly provincial figures);
• 30% - Conservative and hardline deputies.
Reformists/
Moderates
35%
Independents
35%
Conservatives/
Hardliners
30%
Understanding Iran: Post-Elections Environment – 3 March 2016
» Even though the moderate forces have failed to secure a majority in the
Majles, they have achieved symbolic victories that will help attract the
independent deputies towards their agendas
» Based on initial assessments, only 25% of the Majles deputies will retain
their seats, i.e. 75% will be either completely new faces or some
established politicians who are entering the Majles (such as M.R. Aref)
» Many independent provincial deputies are mainly interested in
infrastructure investments in their respective constituencies and usually
align themselves with the government
Understanding Iran: Post-Elections Environment – 3 March 2016
» Nonetheless, some of them are also more closely aligned with the
IRGC
» There is also a relatively new phenomenon that some of the Deputies
have close affiliations with large enterprises, especially in the
provinces
» At the same time, as the outgoing Majles has shown, a few hardline
deputies are enough to irritate the Executive branch, so intense
factional infighting will remain a phenomenon, although the
hardliners will be a minority in the new Majles
Understanding Iran: Post-Elections Environment – 3 March 2016
» The elections have increased the number of moderate / centrist members in the Assembly of Experts (AoE), but it is unclear yet whether the pro-Rafsanjani camp will hold a majority in the new Assembly
» What will help Rafsanjani is the fact that two of the main anti-Rafsanjani personalities (Mohammad Yazdi and Taghi Mesbah Yazdi) have been voted out of the AoE
» The emergence of new faces and a new atmosphere will allow the new AoE to debate some relevant issues such as the oversight over the Supreme Leader (SL) as well as the many institutions that are accountable to the SL
» At the same time, the most important task for the next AoE will be the issue of Ayatollah Khamenei’s succession
» Based on the published lists, one can conclude that the composition has changed:
Understanding Iran: Post-Elections Environment – 3 March 2016
58
36
0 10 20 30 40 50 60 70 80 90 100
Outgoing AoE
Incoming AoE
Pro-Rafsanjani Anti-Rafsanjani
» The results of the twin elections on 26 February can be understood as a
resounding endorsement of President Rohani and his political mentor, former
president Hashemi Rafsanjani
» There will be a number of consequences for Iran's balance of political power:
» In the short term, the Rohani government will have a Majles that is more
favourable to its agenda and it will have more space to engage in the necessary
economic, legal and political reforms;
» In the medium term, the new composition of the Assembly of Experts will give
more influence to Rafsanjani and Rohani in determining who will succeed
Ayatollah Ali Khamenei as the country's Supreme Leader.
Understanding Iran: Post-Elections Environment – 3 March 2016
All in all the events of 26 February have consolidated the power position
of the moderate faction
» This does not, however, mean an end to the influence of arch-
conservative and hardline forces, but it will strongly weaken their
overall ability to disrupt President Rohani's reform agenda
» Although there may be a short-term backlash from the hardline
elements, it is likely that a new balance of power will be achieved until
the next major event that will impact the overall composition of
power, such as the 2017 presidential elections or any debate and
decision about the future successor to the Supreme Leader
Understanding Iran: Post-Elections Environment – 3 March 2016
» Political risk remains an important element in Iran, but the moderate forces are engaged in a process of improving the business climate as well as fighting corruption in order to attract domestic and foreign investment
» The government has intensified its efforts to fight financial and administrative corruption as part of its attempt to improve the business climate
» President Rohani has declared corruption to be a “national security threat” and has promised to apply all his “power to fight corruption”
Understanding Iran: Post-Elections Environment – 3 March 2016
» One can now detect a new momentum in the fight against corruption, but the overall political structure will make the fight very challenging
» The political orientation of the new Majles will help the government in its efforts to improve the investment climate and fight corruption, but the necessary structural and political changes will require a long-term process
» Government and private sector officials are proposing political and structural reforms; genuine privatisation; the promotion of civil society institutions (including an independent media); and the promotion of codes of conduct in the private and public sectors
Understanding Iran: Post-Elections Environment – 3 March 2016
Understanding Iran: Post-Elections Environment – 3 March 2016
Indicators 1394* (21.03.2015 to 20.03.2016)
1395* (21.03.2016 to 20.03.2017)
GDP growth (real in Rial) 1.1% 3.9%
GDP (nominal in US$ at median exchange rate)
$360.7 bn $420.7 bn
GDP per capital (nominal) $4,576 $5,269
GDP per capita (PPP) $15,572 $16,023
Inflation (Official) 16.7% 15.9%
Oil and gas exports $56.0 bn $78.1 bn
Non-petroleum exports (including services)
$44.8 bn $48.3 bn
Imports $68.3 bn $74.0 bn
Trade Surplus $21.4 bn $40.2 bn
Unemployment Official (Unofficial) 10.1% (16.0%) 9.7% (15.9%)
Capital account deficit (in US$) -1.0 bn -1.0 bn
Main source: Iran Economics Magazine, December 2015 (Eqtessad-e Iran), * Projected
» Iran needs annual growth of around 8% to create the jobs that the economy needs
» However, current structural issues won’t allow fast-pace growth
5.9
3
-5.8
-1.9
3
0
4.3
-8
-6
-4
-2
0
2
4
6
8
2012/2013 2011/2012 2012/2013 2013/2014 2014/2015 2015/2016 2016/2017
GDP growth (%)
Impact of moderates returning to government
Impact of low oil prices
Potential impact of sanctions
relief
Understanding Iran: Post-Elections Environment – 3 March 2016
» Now that sanctions are being lifted and the elections has boosted the government, we can expect a unification of the exchange rates within months
» The plan is to reduce the gap between the two existing exchange rates as much as possible to reach a minimum level by July/August 2016
26000
28000
30000
32000
34000
36000
38000
40000
Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16
Free Market Forex Chamber
Understanding Iran: Post-Elections Environment – 3 March 2016
» Although the oil and gas sector is obviously an important hard currency contributor, Iran is more a service based economy
» The highest growth sectors are industry and mining
Sectors’ Contributions to GDP (%) (2014 figures)
Oil & Gas
22%
Agriculture
10%
Social Services
3%
General
Services
9% Professional
services
14%
Financial
services
4%
Transportation
&
Communication
9%
Hotels,
Restaurants
11%
Construction
5%
Utilities
1%
Manufacturing
11%
Mining
1%
Oil & Gas
22%
Agriculture
10%
Services
49%
Industry and
Mining
19%
Understanding Iran: Post-Elections Environment – 3 March 2016
» TSE’s total market capitalisation in January 2016 was US$88.4 billion
» It is still evolving and is looking for ideas on how to regulate and
modernise the market
» The TSE is gearing up for massive foreign investment
Chemicals Other 17.8%
Diversified industries 7.1%
Monetary intermediation 11.6%
Transportation & storage 2.9% Pharmaceuticals
3%
Post & telecommunication 7.4% Metal ores mining
3.8%
Refined petroleum products 4%
Basic metals 6.7%
Tehran Stock Exchange Market
Capitalisation
Source: Tehran Stock Exchange (TSE)
Distribution of Sectors based on Share in Market Capitalisation
Understanding Iran: Post-Elections Environment – 3 March 2016
» The lifting of sanctions has had an immediate psychological and financial
upside for Iran, but genuine economic improvements will take a few years
» Low oil prices and a slower than expected re-entry of international
companies and banks into the Iranian market will influence the gradual
economic recovery
» Finding financial solutions will remain a challenge for Iran related
business, especially because key first-tier banks will be slow to re-enter
Iran
» Operational and legal risks will prevail but the overall trend is improving
Understanding Iran: Post-Elections Environment – 3 March 2016
» Creating employment opportunities will remain the top priority, which
explains the greater emphasis on private sector development
» Iran has embarked on a new era of economic development based on
export-led growth – there is a much greater emphasis on local
capacity building and the creation of JVs
» Iran’s future outlook will ultimately also depend on many economic,
regional and international developments as it will continue to be
inter-dependent on a complex set of phenomena
Understanding Iran: Post-Elections Environment – 3 March 2016
Understanding Iran: Post-Elections Environment – 3 March 2016
Strengths: - Resource-rich economy (oil, gas, minerals
etc.) - Expanding through an export-led growth - Diverse economic base - Geo-strategic position - Expected stability in economic and trade
policies
Weaknesses: - Inflationary environment - Underdeveloped economic infrastructure - Distorted economic realities caused by
revolutionary policies such as subsidies - Current transition due to subsidy reforms - Ambiguities in the economic doctrine
entitled “Economy of Resistance”
Opportunities: - Utilising Iran’s enormous natural and human
resources to create economic value - Taking advantage of relatively low cost of
entry and consolidation in the market - Using domestic and/or international capital
flows to reduce project risk (financing, partnerships etc.)
- Partnering with Iranian companies to take advantage of the growing regional markets
Threats: - Over-confidence in economic terms might
slow down the process of change - The negative short-term impact of lower oil
prices - Undesired side effects of economic
reforms including the inflationary impact of consumer subsidy reforms
Understanding Iran: Post-Elections Environment – 3 March 2016
Strengths: Urbanised, wealthy society with a desire to
connect to global trends, including technological advances
Growing middle class with greater purchasing power and interested in brands
Interested in a peaceful transition rather than a violent upheaval
Young, dynamic and ready to learn and endorse modern concepts
Weaknesses: Social tensions due to unjust distribution
of wealth and subsidy reforms Unemployment and underemployment Social limitations, especially in dress
code
Opportunities: Investing in Iranian society’s loyalty to
premium brands Investing in the long-term potential of Iran Becoming pioneers in introducing new
concepts and technologies to the market
Threats: Security issues emerging from the socio-
economic tensions in society Sporadic hiccups due to the impatient
nature of the younger generation Sporadic unrest due to economic
conditions Spill-over effects from regional tensions
A m
ore
plu
rali
stic
an
d d
em
ocra
tic I
ran
DRIVING FORCES RESTRAINING FORCES
A more moderate Majles that will pass laws needed for reforms
Growth of the private sector and promotion of civil society
Growth of the middle class
Greater interaction with global knowledge flows
Restrictions imposed by the arch-conservative forces
Consolidation of a mafia structure in the economy around the IRGC
and semi-state sector
Depressed and oppressed social structures
Tensions with Western powers which will empower hardliners
Understanding Iran: Post-Elections Environment – 3 March 2016
» The government’s ability to push back against the hardliners after the relative victory in the recent elections – one signpost will be the government’s ability to push through its agenda with investments in the oil and gas sector
» The government’s privatisation efforts and the question of whether they are empowering the semi-state or the private sector
» Social and economic reforms that could promote the private sector and limit the operation of the semi-state sector
Understanding Iran: Post-Elections Environment – 3 March 2016
» Ayatollah Khamenei’s position, and especially with regard to:
» The next Majles Speaker (Ali Larijani versus Mohammad Reza Aref)
» Debates in the new Assembly of Experts on its oversight over the Supreme Leader and organisations that are unaccountable to the government
» Overall decisions on Iran’s greater interaction with the outside world
» Socio-economic trends and social freedoms
» The behaviour of the Iranian diaspora
Understanding Iran: Post-Elections Environment – 3 March 2016
Menas’ Multi-Client Report: Re-engaging the Iranian Market
» Menas’ 24,000 word Special Report
» £2,500 promotional price for attendees (originally £3,000)
» Written by Dr Bijan Khajehpour and his Tehran team
» Further discounts available to subscribers of our monthly publication Iran Strategic Focus
Understanding Iran: Post-Elections Environment – 3 March 2016
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