Patrick Cairns
4 minute read
22 Feb 2016
2:32 pm

Iran 2016 big business opportunity

Patrick Cairns

The lifting of sanctions opens up an economy bigger than South Africa’s.

An Iranian flag outside the Vienna International Centre hosting the United Nations (UN) headquarters and the International Atomic Energy Agency (IAEA) in Vienna, on July 3, 2014

President Jacob Zuma is set to visit Iran later this month. The trip is, in government speak, meant to “strengthen our ongoing political and economic engagements with Iran and boost South-South relations”.

The visit comes just more than a month after the International Atomic Energy Agency made the finding that Iran was compliant with its nuclear obligations. This led to the lifting of the heavy sanctions that have been systematically imposed on the Islamic Republic for many years and restored the country’s position in the global community.

The opening up of the country’s economy will be massively positive for Iran itself, but it is also being seen as a big opportunity for business. South Africa is far from alone in wanting to take advantage of this.

China’s president Xi Jinping was hosted by Iran last month, and the two countries agreed to boost bilateral trade to $600 billion in the next ten years. Iranian president Hassan Rowhani has also already made visits to Italy and France where more economic deals were signed.

According to a new report from The Economist Intelligence Unit, there is plenty to make the country attractive.

“Iran’s economy is unusual among the region’s oil exporters,” the report states. “It boasts the largest natural gas reserves in the world and the fourth-biggest oil reserves, and yet it has a diversified economy (including a significant manufacturing sector), all backed up by a large, youthful, well-educated and welcoming population.”

For instance, the country has the largest automotive sector in the Middle East, which produced over one million cars and commercial vehicles in 2014. Its population is forecast to reach 83.4 million by 2020, making it the second largest consumer market in the Middle East and North Africa.

Investment strategist at 27Four, Nadir Thokan, agrees that it offers a unique opportunity: “Unlike the rest of the Middle East Iran hasn’t developed the bad habit of being highly dependent on oil and oil revenues because they have been isolated from the global economy for some 30 years now,” he says. “They also seem to be more disciplined in terms of the way they manage their finances.”

Thokan points out that Iran is planning to increase its oil production by over 700 000 barrels a day within two years, and he believes that the revenues that creates is going to lead to a significant boost in economic growth.

“Given that growth in the world is so scarce, I think we are going to see massive amounts of foreign direct investment into Iran,” he says.

The EIU report estimates that Iran should see real GDP growth rates of around 5% for the next five years. This is off an estimated base of $416 billion according to the latest figures from the World Bank. This makes Iran’s GDP significantly larger than South Africa’s $350 billion.

However, while this will make it one of the fastest growing economies in the region, there is still need for caution. For a start, the business environment in Iran remains challenging and lower oil prices will keep growth rates lower than their potential. There is also the risk that sanctions would automatically “snap-back” into place should Iran renege on its nuclear commitments.

“Structural impediments to progress in the business environment will take a long time to overcome,” the EIU says. “We expect some reform efforts, but these will be limited by vested interests.”

In particular, it believes that it will be very difficult to compete against businesses controlled by the Islamic Revolutionary Guards Corps, as they will not want to give up the economic influence they accumulated during the era of sanctions.

“Hence, although we expect some improvements to policies towards the private sector and foreign investment, these will remain areas of weakness in the business environment,” the report adds. “The tax system remains complex and inefficient, and financing options are currently limited. Infrastructure is facing serious capacity constraints and needs substantial investment.”

Nevertheless, business with the right risk appetite and the ability to offer products and services that have been unavailable in the country for a long time are not going to see a similar opportunity this year.

“Since they have been isolated for so long, there is a lot of low hanging fruit,” Thokan says.