Dubai set to lure more foreign firms eyeing $200b Iran business
"The gradual and partial removal of sanctions on Iran following the landmark nuclear deal could imply $200 billion annual import demand by 2020, from $80 billion now."
Dubai - Garbis Iradian, chief economist at the Institute of International Finance, or IIF, is of the view that within the Middle East region, Lebanon and the UAE would benefit from the economic rebound in Iran.
More foreign companies could be attracted to Dubai to do business in Iran as the UAE remains best positioned to benefit from a potential upswing in Iranian import demand estimated to hit $200 billion by 2020, analysts said on Thursday.
"The gradual and partial removal of sanctions on Iran following the landmark nuclear deal could imply $200 billion annual import demand by 2020, from $80 billion now. We believe UAE and Turkey are best positioned to enjoy potential upside in Iranian trade volumes," said Turker Hamzaoglu and Jean-Michel Saliba, analysts at BofA Merrill Lynch Global Research.
They argued that the deal struck between Iran and six world powers should also support South Caucasus via freer trade, but could have some negative spill-over effects on Russia via lower oil prices or eventual competition to supply gas to Europe. "Still, sustaining any boost in activity would require Iranian macro reforms, we think," they said.
Garbis Iradian, chief economist at the Institute of International Finance, or IIF, is of the view that within the Middle East region, Lebanon and the UAE would benefit from the economic rebound in Iran. "Given Lebanon's financial skills and regional ties, it could play an important role in the future financing and channeling of investment needed by the Iranian economy. More foreign companies could be attracted to Dubai to do business in Iran," he said.
Iradian believes that a recovery of Iran's oil production and exports would weigh on global oil prices. "The future prices of oil, following the deal, are about $5 barrel lower than a few weeks ago," he said.
IIF's views on oil prices are endorsed by BofA Merrill Lynch analysts who contended that a resumption of Iranian supply could bring down oil prices by $5-10 per barrel.
"The potential return of up to 0.7 million bpd in production over the next 12 months could add downside pressure on forward oil prices of $5-10/bbl, in our Commodity Research team's view. In their base case, as sanctions are unwound, the National Iranian Oil Company to ramps up production to pre-2012 sanction levels of 4.5 million bpd of liquids by 2020 and maintains this with limited development of new fields. The Commodity Research team's medium-term balances still point to a range of $60-80/bbl for Brent," BofA Merrill Lynch analysts said.
With a gross domestic product of $485 billion, Iran is the world's 18th largest economy by purchasing power parity, and is the second largest in the Middle East behind Saudi Arabia and it trails only Egypt in terms of population. The gradual and partial removal of sanctions could help Iran's domestic demand rebound rapidly, especially if oil exports normalise to pre-2012 levels.
"Our analysis suggests the Iranian economy would have matched the size of Saudi Arabia, were it not for sanctions. We think the deal is likely to bring macro benefits to Iran in three stages: cash, trade, and investment," said BofA Merrill Lynch.
The IIF observed that lifting the sanctions would spur a sharp economic recovery with a rise in oil exports, regained access to frozen foreign assets (estimated at about $100 billion), and sizeable foreign capital inflows, largely in the form of foreign direct investment.
"The main benefits would not be felt until next year. However, there would be a significant immediate impact, including an improvement in private sector confidence and the appreciation of the black market exchange rate. The rate has already appreciated by six per cent in recent days," said Iradian.
Assuming implementation goes smoothly, growth could accelerate from about three per cent in 2015/16 to six per cent in fiscal years 2016/17 and 2017/18, driven by a surge in exports and private investment. The fiscal deficit could narrow as oil revenues expand, and the spread between the official and the black market rates could be eliminated by end-2015. The authorities would have greater incentives to press ahead with reforms to improve the business environment to attract new foreign investors.
The IIF believes that the potential long term business opportunities in a sanction-free Iran would be enormous. Iran has a population of 78 million, the labour force is relatively well educated, and the economy is more diversified than other oil exporters in the region.
Lifting economic sanctions, combined with the return of foreign expertise in the energy sector and spare parts, would allow for a rebound in crude oil exports to their pre-sanction levels by mid-2016, and would continue increasing thereafter to around four million barrels a day by end-2017.
Lifting the sanctions would also open Iran's stock market (with market capitalisation of about $100 billion) to foreign participation. Compared to other countries in the region, Iran already has advanced settlement, trading and custody system, IIF said.