WE LOOK AT THE TOTAL AGREEMENT'S SIGNIFICANCE FOR PRESIDENT ROUHANI'S SECOND TERM
As Total re-enters the Iran market with a $4.8 billion investment, Iran PLC shapes up to join the global capital markets through London.
Shortly before Iran’s elections, I was invited to address and chair a conference of invited experts from Rostam Capital, KPMG and Stephenson Harwood before an anticipated 100 member companies of the Tehran Stock Exchange (the “TSE”) on how they might access the global markets. Iran PLC’s appetite for joining the global financial markets was such that there was standing room only as senior representatives from some 250 Iranian companies, institutions, banks and brokerage houses attended the conference, eager to discuss the benefits and obstacles of seeking a dual listing on the LSE. With SMEs accounting for 95% of Iran’s licensed businesses there was particular interest in understanding the requirements of listing on London’s AIM.
Iran is often, and to my mind mistakenly, labelled a frontier or emerging market. In fact, Iran is a re-emerging economy with an extensive economic infrastructure, that can require many years to develop in a newly emerging economy, already in place. Iran PLC’s enthusiasm for FDI should, therefore, be of little surprise. The Middle East’s second largest country, as well as economy, with a population set to reach 100 million by 2020, Iran PLC gained renewed confidence for re-integration into the global economy from the confluence of the successes of four years of President Rouhani’s reformist agenda and of the 2015 Joint Comprehensive Plan of Action (the “JCOPA”) agreed with the P5+1 in 2015. The JCOPA offered the prospect of paving the way for Iran’s banking system to regain access to the SWIFT network. The later had disconnected itself from Iran’s banking system in 2012 when SWIFT was itself sanctioned by the US Senate’s Banking Committee for allowing Iranian banks continued access to the network for international settlements.
PRESIDENT ROUHANI’S FIRST FOUR YEAR TERM
In 2013 Mr Rouhani was elected President on a platform of creating stability and growth. The principal economic achievements of President Rouhani’s first four-year term were to introduce monetary controls, stabilise foreign exchange rates and reduce populist economic subsidies to reduce run-away levels of inflation from 40% in 2013 to a single digit level.
Iran responded to international sanctions by investing in the development of what the Supreme Leader Ali Khamenei’s called a “resistance economy”, a formula under which domestic manufacturing is developed and domestic industrial capability enhanced and which has been successfully applied by several East Asian economies. This drive for import substitution and economic self-sufficiency helped to diversify the country’s industrial base, creating in the process capable domestic companies and skilled contractors.
THE SECOND FOUR-YEAR TERM
The 2015 JCOPA allowed Iran to increase oil exports to an estimated 3.8 MMbpd and increased non-oil exports leading to two consecutive years of non-oil balance of trade surplus; itself a significant differentiator in a region of oil-dependent economies. These have enabled the Rouhani government to turn around economic growth from a negative 5.8% in 2013 to 7% by 2017 and some $10 billion of foreign direct investment to flow into the country in the last twelve months – excluding Total’s $4.8bn announced today. The World Bank forecasts Iran’s economy to grow at an average of 4.1% p.a. in 2017-19 spurred on by the growth of the country’s non-oil sector.
POTENTIAL PRIORITIES FOR THE SECOND TERM
Reviving the economy and creating employment will be key priorities of President Rouhani’s second term. The next phase of Iran’s economic development requires a two-tracked development program. First in developing much-needed, but low job creating, capital-intensive projects to upgrade the country’s industrial and economic base. Second in creating a private equity eco-system that can promote the development of employment-generating entrepreneurial SMEs in tech and service sectors in order to capitalise on Iran’s highly educated and young human capital.
To be sure, the first term of the Rouhani government introduced much needed global standards required to enable the country to begin the process of economic re-emergence and of integration into the global economy. To achieve the economic targets of its second term, however, the Rouhani government will need to secure the significant inflows of FDI consisting of capital as well as technology and best-in-class managerial skills. Generating FDI of the required scale and deploying it well will require the successful introducing of structural reforms. Another major challenge for the second Rouhani term is the restructuring of a banking sector beset by excessive levels of non-performing loans and the regulation of a financial services sectors handicapped by bureaucratic procedures which Iran’s Central Banker Veliollah Saif has recognised as being outdated.
DOES THE PRESIDENT HAVE THE REQUIRED MANDATE?
Implementing such far-reaching structural reforms requires an unequivocal mandate. With strong candidates running for office, the May 2017 elections were possibly the country’s hardest-fought of the recent years. Running on a platform of continued economic reforms President Rouhani increased his support to 57% (2013-51%) in a vote widely seen as a popular endorsement of the JCOPA and a clear mandate for reform.
In his opening remarks to its conference, the CEO of the Tehran Stock Exchange recognised the extent of the work that remains to be done in improving the business climate and in the regulation of financial markets that is required for Iran PLC to fully re-engage with the global capital markets. The long-awaited Total agreement announced today provides a welcome recognition by the international business community of the reforms of the first Rouhani term and a morale booster for the second term.