(MENAFN- Capital Intelligence Ltd) Rating Action
Capital Intelligence Ratings (CI Ratings or CI) today announced that it has revised the Outlook on Iran’s Long-Term Foreign Currency Rating (LT FCR) and Long-Term Local Currency Rating (LT LCR) to Stable from Negative. At the same time, CI Ratings has affirmed the sovereign’s LT FCR and LT LCR at ‘B’, and Short-Term (ST) FCR and ST LCR at B’.
The revision of the outlook reflects the easing of budgetary and external liquidity pressures due to the upturn in hydrocarbon and commodity prices, which CI expects will remain at favourable levels over at least the next two years. The ratings continue to be supported by Iran’s substantial hydrocarbon resources and very low level of external debt.
The ratings are primarily constrained by very high external risks due to US sanctions on Iranian oil exports and financial institutions. The ratings are also adversely affected by the government’s lack of access to external funding and frozen assets, high macroeconomic stability risks, and elevated socio-economic pressures. Although the ratings benefit from a very low level of external debt, the country’s external debt repayment capacity – particularly the ability to make timely debt service payments – remains significantly undermined by US sanctions and the inclusion of Iran on the FATF blacklist in February 2020.
Budgetary pressures have eased since our last review, reflecting the ongoing recovery from the pandemic and the latest surge in hydrocarbon and commodity prices. The central government budget deficit is expected to have declined to 4% of GDP in FY22 (which ended in March 2022), compared to 4.5% in FY21. Notwithstanding the significant increase in revenues, interim budgetary figures still point to high nominal expenditure growth, which is expected to continue throughout the forecast period due to large socio-economic pressures and high CPI inflation. On the revenue side, CI expects further easing of budgetary pressures in the short to medium term, reflecting our forecast of persistently high oil prices (averaging USD100 per barrel in FY23-24), in addition to an 8.7% increase in oil production to 2.76 million barrels per day in FY23, from 2.54 million barrels per day in FY22. As a result, the central government budget deficit is projected to decline to 3.7% of GDP in FY23. As a share of revenues, central government debt remained high at around 4.5 times in FY22, although it is moderate relative to GDP at around 40%.
Liquidity risks remain high, reflecting the government’s restricted access to international borrowing and external assets held abroad. As a result, the government is reliant on local sources of financing, such as local banks and the central bank. Domestic borrowing has been facilitated by a strong expansion of the money supply, which has allowed banks to step up lending to the public and private sectors. The y-o-y growth rate of M2 rose to a very large 42.0% in March 2022, up from 40.6% a year earlier. While attenuating government liquidity pressures over the past year, the expansionary monetary stance has translated into increasing inflationary pressures. CPI inflation stood at a very high 40.1% in FY22, up from 36.4% in FY21. Going forward, CI expects inflationary pressures to ease slightly to a still elevated 29.9% in FY23-24.
External liquidity pressures have improved since our last review, reflecting higher current account receipts from the export of hydrocarbons, commodities and fertilisers. The current account balance is expected to have posted a surplus of 3.7% of GDP in FY22, compared to a small deficit of 0.1% in FY21. Iran’s ratings continue to benefit from a very low level of external debt, which stood at only 1.2% of GDP in FY22. Notwithstanding the above, CI notes that the ongoing US financial sanctions and Iran’s inclusion on the FATF blacklist continue to hamper the country’s external debt repayment capacity, and complicate the routing of cross-border payments through the international banking system.
In terms of economic growth, CI expects real GDP growth to have accelerated to 4% in FY22, and is projected to expand by an average of 2.5% in FY23-24. This reflects our expectation that while the adverse impact of Covid has faded, the economy’s overall growth outlook will continue to be impaired by the presence of financial sanctions and high inflationary pressures. Furthermore, the growth outlook, particularly for the oil and manufacturing sectors, depends crucially on the future development of nuclear talks and a potential lifting of sanctions. CI’s baseline scenario currently does not incorporate the lifting of US sanctions but assumes a modest increase in US oil sanction waivers. As a result, we project a further rebound in oil production in FY23 – but still to a much lower level than prior to the imposition of sanctions.
Projected economic growth will be insufficient to alleviate the country’s large socio-economic problems. The unemployment rate is estimated to have increased to 10.2% in FY22, from 9.8% a year earlier; poverty has also soared in recent years, especially in rural areas. The ratings are also constrained by the very weak financial condition of the domestic banking sector.
The Stable Outlook indicates that the sovereign’s ratings are likely to remain unchanged in the next 12 months, provided that the external risks remain unchanged. It also reflects our view that budgetary and external liquidity pressures will ease further, supported by continued high hydrocarbon prices.
Rating Outlook: Upside Scenario
The Outlook could be revised to Positive in the next 12 months if Iran and the US agree on reviving the nuclear agreement, US sanctions are lifted, and external political tensions decrease markedly.
Rating Outlook: Downside Scenario
The Outlook could be revised to Negative in the event of an unexpected decline in hydrocarbon prices that would translate into higher budgetary and external liquidity pressures. Moreover, the ratings could be lowered by one or more notches in the event of an escalation in external political tensions or a materialisation of large contingent liabilities of the central government.
Primary Analyst: Dina Ennab, Sovereign Analyst, E-mail: firstname.lastname@example.org
Committee Chairperson: Morris Helal, Senior Credit Analyst
About the Ratings
The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.
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