Iran: financial risk assessment

sector risk
structure risk
October 2016 BB B CCC CCC B B
Robert Powell (lead analyst); Pat Thaker (analyst). Published 14 October 2016, 2100 GMT.
The ratings contained in this report and the report itself were produced outside the European Union and therefore are not issued by The Economist Intelligence Unit credit rating agency, which is registered in accordance with Regulation (EC) No 1060/2009 of 16 September 2009, on credit rating agencies, as amended. This report and the ratings, therefore, are not issued pursuant to such Regulation and do not fall within its scope.

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Sovereign risk

We have upgraded Iran’s sovereign risk rating, to BB, as the government has made progress in clearing its domestic and foreign payments arrears. Low public debt obligations support the rating, and, despite weak oil prices, the fiscal deficit is modest. Finally, following the gradual lifting of almost all international nuclear-related sanctions from January, Iran’s sovereign risk score will continue to be buttressed by rising oil exports and inward investment, low external debt levels and improved (albeit still-restricted) access to finance.

Currency risk

The currency risk rating is supported by the gradual lifting of sanctions, the improved outlook for Iran’s economy (including lower inflation) and growing confidence in the rial. On the back of this confidence and in a bid to increase exchange-rate certainty for investors, the central bank is expected to unify the official and the market exchange rates by the end of 2016/17 (March 21st 2017).

Banking sector risk

Banks’ weak asset base, high—albeit falling—levels of non-performing loans and political interference in lending will continue to undermine operations. Mean‑while, although Iran will seek to circumvent US sanctions on US dollar trade by shifting to euros, most foreign banks will continue to avoid dealing with Iran.
Credit risk score graph

Political risk

Although the position of the president, Hassan Rouhani, is expected to be boosted by his re-election in the 2017 presidential polls, the political scene will remain fractured as hardliners seek to undermine the nuclear deal (imple‑mented in January) and the Rouhani administration’s diplomatic outreach. The nuclear deal will allow Iran to rebuild its international ties, but tensions between Iran and both its Gulf Arab neighbours and the US will remain high.

Economic structure risk

Iran’s dependence on hydrocarbons leaves it vulnerable to movements in oil and gas prices and output. Following the implementation of the nuclear deal, the economy will continue to outperform the rest of the region in 2017, but persistently low oil prices will continue to weigh on overall economic activity.