(MENAFNEditorial) 24th October 2014
Iran's Sovereign Ratings Affirmed at 'B'
Capital Intelligence (CI), the international credit rating agency, today announced that it has affirmed Iran's Long-Term Foreign and Local Currency Ratings of 'B', and its Short-Term Foreign and Local Currency Ratings of 'B'. At the same time, the Outlook for Iran's ratings was affirmed at 'Stable'.
Rating Rationale:
Iran's sovereign ratings are supported by the country's substantial hydrocarbon resources, low public debt metrics and large net external creditor position buoyed by persistent - albeit declining - current account surpluses. The ratings are constrained by international sanctions, weakening fiscal performance, high socio-economic challenges and weak institutional strength.
CI notes that the Iranian economy has started to regain momentum following the limited easing of sanctions in November 2013. Economic growth rebounded in FYE 2014, expanding by 1.5% compared to a contraction of 1.9% in FYE 2013, and is expected to increase to over 2% in the medium-term. Inflation has declined, but remained high at about 20% in FYE 2014 (34.7% a year earlier). The Iranian rial (IRR) has also ended its two year streak of sharp depreciation.
Internal political risk factors remain unchanged since CI's last ratings review, which followed the appointment of a more reform-minded government. It also remains uncertain whether Iran will secure a lasting agreement with the P5+1 group of countries regarding its nuclear programme. The deadline for a comprehensive agreement has been extended to November 24 2014; a favourable outcome would possibly have a significant impact on Iran's medium-term economic growth prospects and credit rating. On the downside, there is a risk that international sanctions will be tightened should negotiations fail.
Last year's interim agreement with the P5+1 provided Iran with sanctions relief of about USD7 billion (circa 2% of GDP) and has had a mildly positive effect on the economy. Over the past ten months, Iran has received four installments totaling USD2.8 billion of frozen assets and has been able to maintain oil sales at around one million barrels per day. Moreover, the suspension of sanctions on Iran's petrochemical exports, automobile industry and on the trading of gold and precious metals has reportedly helped generate around USD1.5 billion in revenue.
Iran's public debt remains low and official foreign assets remain sizeable, estimated by CI to be equivalent to almost 16 months of imports of goods and services and around 10 times as high as external debt payments falling due in 2014. However, the country's capacity to absorb external economic shocks is weaker than the headline metrics suggest. In particular, Iran's ability to access and use its foreign assets is seriously constrained by international sanctions, and the exact size of liquid and freely-usable foreign assets is not known.
After a decade of surpluses, the central government budget posted deficits of increasing magnitude in FYE 2013 and FYE 2014, reaching about 2% of GDP. Assuming unchanged policies and declining oil prices, CI expects the budget deficit to increase further to an average of 2.5% of GDP during FYE 2015-2017. Budgetary flexibility has declined, reflecting the reliance on the sanctioned oil sector, as well as rising current expenditure. The government intends to strengthen the budget structure and reduce the budget deficit by revising non-oil taxes, improving tax administration and pressing ahead with planned cuts in fuel and food subsidies. Nevertheless, a substantial improvement in fiscal outturns appears unlikely while sanctions are in place and the domestic economy remains weak.
Geopolitical risk factors have increased during the past four months, reflecting the escalating conflict in neighboring Iraq as well as in Syria; the emergence of the extremist group ISIS may also pose security challenges to Iran.
Outlook:
The Outlook for the ratings is 'Stable'. This indicates that Iran's sovereign ratings are likely to remain unchanged within the next 12 months provided that key metrics evolve as envisioned in CI's baseline scenario and no other credit quality concerns arise.
The 'Stable' Outlook reflects CI's expectation that political risk will remain broadly unchanged in the short-term – as economic management gradually improves. The Outlook also balances budgetary and socio-economic challenges against the low level of public debt and the government's net creditor position.
CONTACT
Primary Analyst
Dina Ennab
Sovereign Analyst
Tel: +357 2534 2300
E-mail: dina.ennab@ciratings.com
Rating Committee Chairman
Morris Helal
Senior Credit Analyst
The ratings have been initiated by Capital Intelligence. The issuer did not participate in the rating process. The information source used to prepare the credit ratings is public information. CI had access to the published fiscal and external accounts of the rated entity for the purposes of the rating, but did not have access to any other relevant internal documents. However, CI considers the quality of information available on the issuer to be satisfactory for the purposes of assigning and maintaining credit ratings. Capital Intelligence does not audit or independently verify information received during the rating process.
The rating has been disclosed to the rated entity and released with no amendment following that disclosure. Ratings on the issuer were first released in April 2007. The ratings were last updated in April 2014.
The principal methodology used in determining the ratings is Sovereign Rating Methodology. The methodology, the meaning of each rating category, the time horizon of rating outlooks and the definition of default, as well as information on the attributes and limitations of CI's ratings, can be found at www.ciratings.com. Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at http://cerep.esma.europa.eu.
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