Looking around the world, there are very few examples of a country with the size of Iran that has not been opened to the global economy. Iran is the second largest economy in the Middle East and North Africa (MENA) region after Saudi Arabia, with an estimated GDP of US$D 406.3 billion in 2014. It also has the second largest population of the region after Egypt, with an estimated 78.47 million people.

If a deal is reached to lift sanctions, oil exports are expected to rebound to pre-sanctions levels by 2017. This will provide substantial cash-flow to the economy for investments that are badly needed to upgrade its oil and gas infrastructure as well as roads, bridges and transportation sector to growth (the national airline has consistently been deprived of spare parts and equipment during the sanctions period). Oil makes up about 80 % of total export earnings and 50% to 60% of government revenues. The country is the second largest in the world in natural gas reserves and fourth in proven crude reserves.



US Energy Information Agency

The energy market alone, according to MEED, provides an opportunity of up to $167 billion of investment needed once sanctions are lifted. There are around 197 individual energy (oil, gas, petrochemical, industry and utilities) projects either planned or under way in Iran which MEED is tracking and this could double once the market is formally open for foreign direct investment. The projects themselves are substantial from the Kish gas development ($4.5bil) to the Jask oil terminal project ($2.5bil).
However, it is not just the energy sector which holds huge potential for foreign investors. Iran is potentially a regional powerhouse consumer and industrial economy. Its population of around 78m people are young, well-educated and hungry for foreign brands and products. It has a large and growing middle class with active participation of women in the workforce. The country also has a fully functioning and active stock exchange with a total market capitalization of around $170bn with early interest from global emerging market investors as stocks are relatively under-valued.

In the manufacturing sector, Iran is relatively advanced as compared to the rest of the Middle East. Due to sanctions, the sector has had to be self-sufficient in developing its capacity to service the economy. For example, Iran produced 50pc more cars than Turkey in 2011, according to research by Renaissance Capital. The market for cars and lorries used to be the 10th largest in the world, and is attracting keen attention from European companies such as Peugeot and Renault. Foreign steel and aluminum manufacturers will be attracted to the Iranian market due to its cheap natural gas reserves and deep-sea ports.

However, investors need to be caution in dealing with Iranian counterparties. Firstly a substantial number of companies are controlled by government and government related entities thus making a local partner critical in navigating the bureaucracy. Secondly, the speed at which trade and investment opportunities open up will depend on how quickly banks can provide trade facilities and project financing. Each bank will make its own judgments about when it is safe to start doing business with their Iranian counterparts (already some GCC banks are looking to open offices in Tehran). 

Provided there is no substantial geopolitical event or a major violation by the Iranian government on its nuclear agreement, then the entry to the market for the country could be a significant opportunity for investors to participate in its redevelopment and growth.

Murugan Sankaran

Mr. Murugan Sankaran, is Chief Executive Officer with IL&FS Global Financial Services Ltd. ( ME ) – IGFSL,ME
IGFSL,ME is a 100% subsidiary of IL&FS Financial Services Ltd.

Website link : http://www.ilfsifin.com/Dubai/index.html


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