Iran election outcome may weigh on nuclear deal talks and economic recovery, IIF says

Limited agreement would mean GDP growth of 4.1% next year, while a more comprehensive agreement would trigger a 6% expansion

Iran’s president-elect Ebrahim Raisi. The election of hardliners has dealt a blow to hopes for a comprehensive nuclear deal, the IIF says. AFP

The consolidation of power by hardliners in Iran after the election of Ebrahim Raisi is expected to limit the scope of the nuclear deal with the international community and, ultimately, the pace of the country's economic recovery.

Iran has been engaged in talks to re-establish or renegotiate the Joint Comprehensive Plan of Action, which was struck in 2015 and lifted some economic sanctions in return for limits on the country's nuclear programme.

The US withdrew from the pact in 2018 under the Trump administration.

If a more ambitious, renegotiated deal is agreed upon, Iran's economy could grow by 4.3 per cent this year and 5.9 per cent in 2022, the Institute of International Finance said.

However, a deal that is more limited in scope would restrict the country's recovery, limiting gross domestic product growth to 3.5 per cent this year and 4.1 per cent in 2022.

If Tehran does not reach a deal and the current sanctions remain in place, growth – which stood at 3.6 per cent in 2019 – would slow to 1.8 per cent this year and 1.6 per cent in 2022.

“Iran’s current position is to restore the 2015 deal without changing the terms. Even if an agreement is reached to lift most economic and financial sanctions, [Mr] Raisi’s conservative foreign and economic policies ... may deter foreign investors, particularly from Europe and the US,” the institute said in a paper written by its chief Mena economist Garbis Iradian and Clay Lowery, executive vice president of research and policy.

A comprehensive deal would attract foreign capital flows from Europe and the emerging Asia region, including foreign direct investment across all sectors of the economy, according to the paper.

The opening up of the Iranian economy to the world will also result in “a significant decline in unemployment”.

Iran’s unemployment levels currently stand at about 20 per cent.

A growing current account surplus as a result of increasing oil exports would boost official reserves to about $143 billion by the end of 2023, up from $70bn in May this year – 90 per cent of which is currently frozen due to US sanctions, the IIF said.

However, the election of hardliners means hopes for a more comprehensive deal may already have “evaporated”, the IIF said.

A more modest deal based on the 2015 agreement would boost Iran’s reserves and narrow its fiscal deficit to 3.4 per cent this year and 1.8 per cent next – from 5.4 per cent last year – but it “may not reduce unemployment significantly”.

Should Iran fail to negotiate a nuclear deal with the West, its economy will probably remain “fragile” but not on the brink of collapse.

Tehran is also expected to align its economy more closely with that of China, which has stepped in to develop projects in Iran after western companies pulled out after the reimposition of sanctions, the IIF said.

Beijing has committed to investing between $400bn and $600bn in Iran over the next 25 years.

China, the world’s top importer of crude, has also been aggressively buying Iranian oil and condensate, with its imports doubling in volume between September 2020 and April this year, compared with the same period in the preceding years.

The possible return of Iranian crude to global markets will probably depress prices, the IIF said.

“The lifting of economic sanctions, combined with the return of foreign expertise in the energy sector and renewed ability to purchase spare parts, would allow for a rebound in Iranian crude oil and condensates exports to their pre-sanction levels of 2.5 million barrels per day within 12 months,” the report said.

Opec+, which is looking to bring 2 million bpd back to the markets by July, may have to put a pause on additional supply and maintain current levels to support the markets, it said.

Oil futures have been trading at multi-year highs with both international benchmark Brent and West Texas Intermediate, the main US gauge, rallying above $70 a barrel.

Brent settled 0.82 per cent higher at $76.18 a barrel on Friday while WTI settled 1.02 per cent higher at $74.05 a barrel.