What global CEOs will encounter in Iran

TEHRAN: The Iranian nuclear pact will gradually reopen an economy bigger than Thailand’s and with oil reserves rivaling those of Canada. Here’s what investors will encounter. How big is Iran’s economy?Iran’s $415 billion economy is the second-largest in the Middle East after Saudi Arabia.

Unveiling his nation’s economic plan for the next five years, Supreme Leader Ayatollah Ali Khamenei said last month that Iranmust aspire to average annual growth of 8 percent. The economy may grow 4 percent this Iranian financial year, double the pace expected before the nuclear deal, according to the deputy governor of Iran’s central bank. As global sanctions were tightened in 2012, the economy dipped into recession for two years. It is 15-to-20 percent smaller than it would have been without the international curbs enacted after 2010, according to a Congressional report published in January.

Who are Iran’s

main trade partners?Iran’s largest trade partner in the first quarter of the current Iranian year was China, which imported more than $1.9 billion in goods. Iraq followed with $1.5 billion and the United Arab Emirates was No. 3 at about $1.3 billion. In the same period, Iran imported more than $2.6 billion in goods from China.

How much of Iran’s

economy is state-controlled?As much as 80 percent was state owned until July 2006, when Khamenei decreed a privatization program. The government says its footprint has shrunk to 20 percent, though its oversight of institutions such as pension funds gives it greater power than that number implies.

The privatization drive was carried out at a time when the private sector was small. Banks weren’t providing credit for private companies to buy state holdings and foreign investors were nonexistent, said Ramin Rabii, managing director of Turquoise Partners, a Tehran-based investment firm. As a result, he estimates, the government still controls about 70 percent of the economy.

How oil-dependent is

Iran’s economy?An OPEC member, Iran holds 10 percent of the world’s oil reserves. Crude exports dropped to an average 1.6 million barrels a day in 2014, from 2.6 million barrels in 2011, before sanctions were enforced on Iran’s energy exports, according to the U.S. Energy Information Administration. Revenue from crude sales represents just 15 percent of Iran’s GDP, Turquoise Partners said, citing central bank data.

Faced with sanctions and declining oil prices, Khamenei urged officials in October 2014 to reduce dependency on oil and focus on expanding domestic manufacturing.

What’s of interest

for foreign investors?Investors may prefer the car industry, manufacturing, energy and agriculture, according to Renaissance Capital’s chief economist Charles Robertson. Renaissance estimates $1 billion in foreign money – equal to 5 percent of all money in frontier markets – may be directed to Iran’s stock market in 2016 following an opening this year.

Relatively cheap labor costs – in some sectors lower than in China – can make Iran’s manufacturers attractive to foreign investors, according to analysts and fund managers who visited Tehran in May.

Low energy costs would benefit cement and steel companies, and mobile-phone penetration of 105 percent makes the telecommunications industry a potentially profitable area, according to Turquoise Partners.

How big is Iran’s stock market?The Tehran Stock Exchange is the country’s main equities market. In the 12 months to Aug. 3, its main board of shares declined 11 percent. Market capitalization is about $95 billion. From the start of the final round of nuclear talks on June 26, the market has climbed 3 percent.

Since Hassan Rouhani became president in June 2013, after vowing to improve the economy and reach out to the West, the index has risen 32 percent. Declining oil prices and missed nuclear talks deadlines have weighed, some analysts said. Daily increases are capped at 5 percent, according to the exchange.

Petroleum, petrochemicals and telecommunications companies are the market heavyweights.

Banks and steel and cement manufacturers follow.

How can foreigners

invest in Iran?Foreigners must apply for a license to invest in Iran. Officials say obtaining a permit takes at most 10 days.

Under 2002 legislation, foreign and Iranian investors must be treated equally, with the same protections. Foreigners cannot own land and their stake in any economic sector is capped at 25 percent unless producing nonoil goods for export. Investors have to give three months’ notice before repatriating capital.

What about Iran’s banking sector?Iran’s Islamic banking assets are worth an estimated $482 billion, according to Dubai government data from 2014, more than the Shariah-compliant banking assets in Saudi Arabia, the UAE and Malaysia combined. Burdening the industry is a relatively large ratio of nonperforming loans – 15.4 percent, according to the IMF, more than Libya and Yemen.

Bad loans total $32 billion, the finance ministry and central bank calculate. Authorities are investigating the bad loans. Sanctions have isolated Iran’s banks from global financial markets and cut off their access to foreign funding.

How is Iran’s

currency doing?According to the IMF, the Iranian rial lost about 80 percent of its value in the year to late 2012, as a result of sanctions. Since Rouhani took office, the central bank has tightened credit and stabilized the rial. It has announced plans to unify two exchange rates – an open market rate and a more depreciated “export rate” – within six months of a nuclear deal.