Monday 23 / December / 2024
Tehran: For Iranian President Hassan Rouhani, the lifting of sanctions brings "the opportunity for an economic leap." Foreign financiers are going to take some persuading to make that jump.
Certainly, Iran offers potential following years of exile.
Overseas investors note the country's stocks look cheap next to those in similar countries. The benchmark TEDPIX stock index trades at a measly 5.7 times earnings, according to Bloomberg News. The MSCI Emerging Market index trades at 10.9 times earnings and the MSCI Frontier Markets Index is valued at 9.44 times earnings. The Tehran Stock Exchange includes 318 listed companies with a total market capitalisation of around $90 billion, according to its website.
The economy is also expected to outpace its regional peers. The World Bank forecasts growth will rebound from 1.9 per cent in 2015 to 5.8 per cent in this year and 6.7 per cent next year. That will outpace growth in the wider Middle East and North Africa, which is estimated to reach 3.8 per cent in 2016 and 4.4 per cent in 2017.
Economic diversity is a strength too. Although oil and gas is a key economic driver, investors are eyeing banks, telecommunications and retail as potentially hot industries. Infrastructure bankers spy potential fees in massive oil and gas reserves and underdeveloped infrastructure that require funding.
But turning a quick profit in the country won't be easy.
For starters, investors could find themselves caught in a crush of foreigners trying to get in. When western sanctions on Myanmar were lifted in 2013, there weren't enough decent hotel rooms in the country to accommodate the flood of bankers that showed up. That won't happen in Tehran's modern urban centre. But a rush of foreign money could push up asset prices quickly.
Most important of all, though there's the fine detail on sanctions to work through. Iranian officials hailed the lifting of nuclear sanctions on the weekend. But Western institutions will be cautious while many of the country's institutions and individuals are still restricted under terrorism sanctions.
In particular, the banks that grease the wheels of international finance will be desperate to avoid the risk of fines by US regulators for compliance failings. It's less than a year since France's BNP Paribas was fined $9 billion for sanctions violations. London-based Standard Chartered has paid almost $1 billion to US authorities in recent years over similar allegations. The prospect of more fines will surely curtail bankers' exuberance — and cross-border flows of financing will only move slowly until all the right boxes are checked.
There's political risk too — the recent flare up between Saudi Arabia and Iran is a warning shot — and the risk that economic growth doesn't materialised as hoped, especially because of sliding oil prices. Brent crude traded near a 12-year low in London on Monday.
Still, such are the problems of investing in developing economies. Investors looking at Iran ought to know what they're getting into — and banks will be especially wary of the dangers.
