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Iran – Sovereign Ratings Affirmed and Withdrawn
(MENAFN- Capital Intelligence Ltd) Rating Action
Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed Iran’s Long-Term Foreign Currency Rating (LT FCR) and LT Local Currency Rating (LT LCR) at ‘B’ with a Stable Outlook. At the same time, CI Ratings has affirmed the sovereign’s Short-Term (ST) FCR and ST LCR at ‘B’. CI has subsequently withdrawn the ratings on Iran for commercial reasons.
The affirmation of the ratings reflects Iran’s comparatively low gross external debt and low central government debt (relative to GDP), as well as the country’s large hydrocarbon reserves and fairly diversified economy. The external current account remains in surplus and the usable foreign exchange assets under the control of the Central Bank of Iran (CBI) currently appear to be adequate for balance of payments purposes.
The ratings are mainly constrained by the very high and increasing level of geopolitical risk, as well as the lack of access to external funding and foreign assets. Although external debt is low, the country’s external debt repayment capacity – particularly the ability to make timely debt service payments – remains greatly impaired by US sanctions and the inclusion of Iran on the FATF blacklist. The ratings are also constrained by very limited data disclosure, the broader impact of US and EU sanctions on foreign trade and inward direct investment, high macroeconomic stability risks, very high inflation, and the weakness of the banking sector.
External risk factors have increased significantly since our last review and are considered very high. This is attributable to the escalating regional tension between Israel and Iran due to the war in Gaza and Lebanon. The likelihood of a broader regional conflict that directly involves Iran has increased in the past few months. Should this event materialise, it would have a significant impact on the Iranian economy. Although our baseline scenario factors in the increase in geopolitical risk factors, it does not incorporate a direct military escalation between Israel and Iran at present.
Iran’s fiscal strength is weak given limited revenue mobilisation (11.6% of GDP in FY24, which ended in March) and a moderately high debt burden. The central government budget deficit is expected to increase to 3.4% of GDP in FY25, from 3.1% in FY24, reflecting lower than projected hydrocarbon revenues and increasing expenditures. Going forward, CI expects nominal spending to remain high over the forecast horizon due to large socio-economic pressures, persistently elevated CPI inflation, and a significant depreciation of the Iranian Rial (IRR) in the parallel market. Oil revenues are expected to remain below historical levels due to the government’s limited exporting capacity as a result of US sanctions. Based on an average oil price assumption of USD70 per barrel in 2025-27, CI expects the deficit to average at 3.1% of GDP in FY25-27.
The ratio of central government debt to GDP was low at around 34.6% in FY24, with almost all of the debt held locally. Relative to budget revenue, however, central government debt remained high at around 3.0 times in FY24. Interest expense increased to a high 14.6% of revenues, from 9.2% in FY23, reflecting tighter monetary policy, very high inflation, and the short- to medium-term nature of government treasury bills and loans.
Liquidity risks remain high given the government’s restricted access to international borrowing and to external assets held abroad. As a result, the government is reliant on local sources of financing such as domestic banks, the National Development Fund of Iran, and the CBI.
CPI inflation is expected to remain very high at 29.5% in FY25 (31.7% in FY24), and to average at 26.7% in FY26-27, provided that no significant exchange rate depreciation occurs. Moreover, the margin between the parallel market rate and the official rate remains very high, with the USD recently trading at around IRR636,000 in the parallel market, while the official fixed exchange rate for essential imports was adjusted to IRR285,000 per USD. CI views that the large margin between the parallel market and the official rate continues to jeopardise macroeconomic stability.
External strength is moderately weak, reflecting the lack of access to external funding and foreign assets. The current account balance is expected to register a surplus of 2.7% of GDP in FY25 (2.4% in FY24), supported by increasing terms of trade with China and Russia. Iran’s ratings continue to benefit from the very low level of external debt, which stood at just 3.5% of GDP in FY24.
In terms of economic performance, real GDP is expected to expand by 3.1% in FY25, reflecting moderate growth in the hydrocarbon and non-hydrocarbon sectors. Moving forward, real GDP is expected to increase by an average of 2.6% in FY26-27, with prospects for stronger sustained growth hampered by very high inflation and geopolitical uncertainties, the likely continuation of tough sanctions, weak infrastructure and production capacity constraints, as well as domestic political risk factors.
The ratings remain constrained by the weakness of the domestic banking sector. Reflecting very high inflation, the asset quality of Iranian banks continues to deteriorate, with the average NPL ratio increasing to 7.3% in September 2023, from 6.8% in March 2023. However, the asset quality of banks might be weaker than suggested by official figures due to the uncertainty surrounding the classification of problematic assets. Risks to asset quality also emanate from the high share of investment holdings deemed overvalued, as well as extensive related-party lending. CI views that the accumulation of NPLs and insufficient capital could increase the risk of a financial crisis. This is exacerbated by the higher provision of directed credit by the government. Moreover, it is understood that Iranian banks continue to face liquidity shortages amid continued cash deposit withdrawals, which has led to some banks limiting large withdrawals and offering higher rates on deposits.
Rating Outlook
The Stable Outlook for the ratings – which are at a level indicating significant credit risk – balances the country’s low external debt and continued current account surplus against very high geopolitical risks, as well as the ongoing adverse impact of US sanctions on Iranian oil exports and financial institutions.
Contact
Primary Analyst: Dina Ennab, Sovereign Analyst; E-mail: ...
Committee Chairperson: Morris Helal, Senior Credit Analyst
About the Ratings
This credit rating action has been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.
The credit ratings outstanding at the time of withdrawal were based on public information. Prior to the withdrawal of the ratings, CI considered the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.
The principal methodology used to determine the withdrawn ratings is the Sovereign Rating Methodology dated September 2018 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at
Ratings on the entity were first released in April 2007. The ratings were last updated in April 2024. The decision to withdraw the ratings and any concurrent rating actions were disclosed to the rated entity prior to publication and were not amended following that disclosure.
The following scheme is applicable in accordance with EU regulatory guidelines and refers to the ratings at the time of withdrawal.
Unsolicited Credit Rating
With Rated Entity or Related Third Party Participation: No
With Access to Internal Documents: No
With Access to Management: No
Conditions of Use and General Limitations
The information contained in this publication including opinions, views, data, material and ratings may not be copied, distributed, altered or otherwise reproduced, in whole or in part, in any form or manner by any person except with the prior written consent of Capital Intelligence Ratings Ltd (hereinafter “CI”). All information contained herein has been obtained from sources believed to be accurate and reliable. However, because of the possibility of human or mechanical error or other factors by third parties, CI or others, the information is provided “as is” and CI and any third-party providers make no representations, guarantees or warranties whether express or implied regarding the accuracy or completeness of this information.
Without prejudice to the generality of the foregoing, CI and any third-party providers accept no responsibility or liability for any losses, errors or omissions, however caused, or for the results obtained from the use of this information. CI and any third-party providers do not accept any responsibility or liability for any damages, costs, expenses, legal fees or losses or any indirect or consequential loss or damage including, without limitation, loss of business and loss of profits, as a direct or indirect consequence of or in connection with or resulting from any use of this information.
Credit ratings and credit-related analysis issued by CI are current opinions as of the date of publication and not statements of fact. CI’s credit ratings provide a relative ranking of credit risk. They do not indicate a specific probability of default over any given time period. The ratings do not address the risk of loss due to risks other than credit risk, including, but not limited to, market risk and liquidity risk. CI’s ratings are not a recommendation to purchase, sell, or hold any security and do not comment as to market price or suitability of any security for a particular investor.
The information contained in this publication does not constitute investment or financial advice. As the ratings and analysis are opinions of CI they should be relied upon to a limited degree and users of this information should conduct their own risk assessment and due diligence before making any investment or other business decisions.
Copyright © Capital Intelligence Ratings Ltd 2024
Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed Iran’s Long-Term Foreign Currency Rating (LT FCR) and LT Local Currency Rating (LT LCR) at ‘B’ with a Stable Outlook. At the same time, CI Ratings has affirmed the sovereign’s Short-Term (ST) FCR and ST LCR at ‘B’. CI has subsequently withdrawn the ratings on Iran for commercial reasons.
The affirmation of the ratings reflects Iran’s comparatively low gross external debt and low central government debt (relative to GDP), as well as the country’s large hydrocarbon reserves and fairly diversified economy. The external current account remains in surplus and the usable foreign exchange assets under the control of the Central Bank of Iran (CBI) currently appear to be adequate for balance of payments purposes.
The ratings are mainly constrained by the very high and increasing level of geopolitical risk, as well as the lack of access to external funding and foreign assets. Although external debt is low, the country’s external debt repayment capacity – particularly the ability to make timely debt service payments – remains greatly impaired by US sanctions and the inclusion of Iran on the FATF blacklist. The ratings are also constrained by very limited data disclosure, the broader impact of US and EU sanctions on foreign trade and inward direct investment, high macroeconomic stability risks, very high inflation, and the weakness of the banking sector.
External risk factors have increased significantly since our last review and are considered very high. This is attributable to the escalating regional tension between Israel and Iran due to the war in Gaza and Lebanon. The likelihood of a broader regional conflict that directly involves Iran has increased in the past few months. Should this event materialise, it would have a significant impact on the Iranian economy. Although our baseline scenario factors in the increase in geopolitical risk factors, it does not incorporate a direct military escalation between Israel and Iran at present.
Iran’s fiscal strength is weak given limited revenue mobilisation (11.6% of GDP in FY24, which ended in March) and a moderately high debt burden. The central government budget deficit is expected to increase to 3.4% of GDP in FY25, from 3.1% in FY24, reflecting lower than projected hydrocarbon revenues and increasing expenditures. Going forward, CI expects nominal spending to remain high over the forecast horizon due to large socio-economic pressures, persistently elevated CPI inflation, and a significant depreciation of the Iranian Rial (IRR) in the parallel market. Oil revenues are expected to remain below historical levels due to the government’s limited exporting capacity as a result of US sanctions. Based on an average oil price assumption of USD70 per barrel in 2025-27, CI expects the deficit to average at 3.1% of GDP in FY25-27.
The ratio of central government debt to GDP was low at around 34.6% in FY24, with almost all of the debt held locally. Relative to budget revenue, however, central government debt remained high at around 3.0 times in FY24. Interest expense increased to a high 14.6% of revenues, from 9.2% in FY23, reflecting tighter monetary policy, very high inflation, and the short- to medium-term nature of government treasury bills and loans.
Liquidity risks remain high given the government’s restricted access to international borrowing and to external assets held abroad. As a result, the government is reliant on local sources of financing such as domestic banks, the National Development Fund of Iran, and the CBI.
CPI inflation is expected to remain very high at 29.5% in FY25 (31.7% in FY24), and to average at 26.7% in FY26-27, provided that no significant exchange rate depreciation occurs. Moreover, the margin between the parallel market rate and the official rate remains very high, with the USD recently trading at around IRR636,000 in the parallel market, while the official fixed exchange rate for essential imports was adjusted to IRR285,000 per USD. CI views that the large margin between the parallel market and the official rate continues to jeopardise macroeconomic stability.
External strength is moderately weak, reflecting the lack of access to external funding and foreign assets. The current account balance is expected to register a surplus of 2.7% of GDP in FY25 (2.4% in FY24), supported by increasing terms of trade with China and Russia. Iran’s ratings continue to benefit from the very low level of external debt, which stood at just 3.5% of GDP in FY24.
In terms of economic performance, real GDP is expected to expand by 3.1% in FY25, reflecting moderate growth in the hydrocarbon and non-hydrocarbon sectors. Moving forward, real GDP is expected to increase by an average of 2.6% in FY26-27, with prospects for stronger sustained growth hampered by very high inflation and geopolitical uncertainties, the likely continuation of tough sanctions, weak infrastructure and production capacity constraints, as well as domestic political risk factors.
The ratings remain constrained by the weakness of the domestic banking sector. Reflecting very high inflation, the asset quality of Iranian banks continues to deteriorate, with the average NPL ratio increasing to 7.3% in September 2023, from 6.8% in March 2023. However, the asset quality of banks might be weaker than suggested by official figures due to the uncertainty surrounding the classification of problematic assets. Risks to asset quality also emanate from the high share of investment holdings deemed overvalued, as well as extensive related-party lending. CI views that the accumulation of NPLs and insufficient capital could increase the risk of a financial crisis. This is exacerbated by the higher provision of directed credit by the government. Moreover, it is understood that Iranian banks continue to face liquidity shortages amid continued cash deposit withdrawals, which has led to some banks limiting large withdrawals and offering higher rates on deposits.
Rating Outlook
The Stable Outlook for the ratings – which are at a level indicating significant credit risk – balances the country’s low external debt and continued current account surplus against very high geopolitical risks, as well as the ongoing adverse impact of US sanctions on Iranian oil exports and financial institutions.
Contact
Primary Analyst: Dina Ennab, Sovereign Analyst; E-mail: ...
Committee Chairperson: Morris Helal, Senior Credit Analyst
About the Ratings
This credit rating action has been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.
The credit ratings outstanding at the time of withdrawal were based on public information. Prior to the withdrawal of the ratings, CI considered the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.
The principal methodology used to determine the withdrawn ratings is the Sovereign Rating Methodology dated September 2018 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at
Ratings on the entity were first released in April 2007. The ratings were last updated in April 2024. The decision to withdraw the ratings and any concurrent rating actions were disclosed to the rated entity prior to publication and were not amended following that disclosure.
The following scheme is applicable in accordance with EU regulatory guidelines and refers to the ratings at the time of withdrawal.
Unsolicited Credit Rating
With Rated Entity or Related Third Party Participation: No
With Access to Internal Documents: No
With Access to Management: No
Conditions of Use and General Limitations
The information contained in this publication including opinions, views, data, material and ratings may not be copied, distributed, altered or otherwise reproduced, in whole or in part, in any form or manner by any person except with the prior written consent of Capital Intelligence Ratings Ltd (hereinafter “CI”). All information contained herein has been obtained from sources believed to be accurate and reliable. However, because of the possibility of human or mechanical error or other factors by third parties, CI or others, the information is provided “as is” and CI and any third-party providers make no representations, guarantees or warranties whether express or implied regarding the accuracy or completeness of this information.
Without prejudice to the generality of the foregoing, CI and any third-party providers accept no responsibility or liability for any losses, errors or omissions, however caused, or for the results obtained from the use of this information. CI and any third-party providers do not accept any responsibility or liability for any damages, costs, expenses, legal fees or losses or any indirect or consequential loss or damage including, without limitation, loss of business and loss of profits, as a direct or indirect consequence of or in connection with or resulting from any use of this information.
Credit ratings and credit-related analysis issued by CI are current opinions as of the date of publication and not statements of fact. CI’s credit ratings provide a relative ranking of credit risk. They do not indicate a specific probability of default over any given time period. The ratings do not address the risk of loss due to risks other than credit risk, including, but not limited to, market risk and liquidity risk. CI’s ratings are not a recommendation to purchase, sell, or hold any security and do not comment as to market price or suitability of any security for a particular investor.
The information contained in this publication does not constitute investment or financial advice. As the ratings and analysis are opinions of CI they should be relied upon to a limited degree and users of this information should conduct their own risk assessment and due diligence before making any investment or other business decisions.
Copyright © Capital Intelligence Ratings Ltd 2024
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