Iran: World’s Most Promising Frontier Market

EghtesadOnline: Five years ago Iran was in deep international isolation, as the US and European sanctions had largely blocked foreign investment, plunged the country into recession and increasingly increased its dependency on Chinese economic and diplomatic ties to keep itself afloat.

News ID: ۷۷۸۹۰۴

30 August 2017

Long and tortuous negotiations resulted in a new agreement signed in 2015 when Iran agreed to limit the scope of its nuclear program in exchange for the lifting of economic sanctions and this grand diplomatic bargain is now beginning to bear fruit, reads an article published in Rising-powers.com. Excerpts follow:

International investors are once again flying to Tehran to talk business and investment. Many are still wary and unwilling to commit to investing straight away while others are eager to cut deals quickly.

Tehran’s stock market is nearly all domestically held and despite years of economic strife and isolation is worth a hefty $100 billion. Tehran Stock Exchange and the country’s economy as a whole represent the world’s biggest untapped frontier market opportunity. Other small countries like Cuba are also opening to investors, but with an 80 million population and half of those under 30, Iran has the demographics and a large consumer market on its side, according to Financial Tribune.

Iran may be classed as a frontier market, but it is a relatively wealthy one, with a per capita income of around $5,000 or $16,000 using the purchasing power parity method.

Diverse Economy

Surprisingly, it also has a relatively diverse economy, not the oil and gas mono-focused economy that many assume and which characterizes many of its Arab neighbors. Another interesting signal of a fast changing economy and perhaps society is the rapid uptake of smartphones, from 2 million handsets in 2014 to 48 million phones presently, meaning well over half the country now own one.

For foreign investors, traditional sectors like petrochemicals, mining and finance are currently the most alluring in terms of placing funds, but in the longer term other areas like pharmaceuticals, fast-moving consumer goods and tech-related ventures could be the long-term winners as these are more dependent on long-term demographics and middle class demand rather than commodity cycles and less likely to face government interference.

Tehran Stock Exchange is open and ripe for new investment and the country’s companies and people are eager to take on funding, new ideas and foreign partners.

Trump’s Shadow

Unfortunately, a shadow lies over the country as the Trump administration appears eager to use any excuse to end the nuclear deal. It remains to be seen whether Trump’s bark is worse than his bite, but if the US does push for a full resumption of sanctions, it may struggle to bring its European allies on board, forcing the US to act alone, thus potentially weakening the power of any new sanctions.

Geopolitics is the obvious risk for any investor considering investing in the country, but there are some other issues that should be considered before rushing to place funds in Iran.

Iran’s lengthy disconnection from the international banking system means that it lacks access to modern financial custodial services, the nation’s banking sector is behind its international peers in areas like know your customer processes and most firms do not yet adhere to international accounting standards.

The country also still lacks an efficient foreign exchange market and for a fund like Tundra that trades daily, the ability to move money in and out of a country with ease and low cost is vital.

All of these issues make it impossible for many to do business in the country yet, but it is hoped that the relaxation of sanctions will allow the Iranian financial sector to catch up with the rest of the world.

The Iranian banking system as a whole also faces major challenges, as it has long suffered from an unhealthy level of nonperforming debt and excessive government intervention in its lending policy, all of which is acting as a drag on the economy as a whole.

China: A Major Fixture

China has been a major fixture in Iran for many years; a close ally that largely ignored the western sanctions regime. While European and US firms fled, Chinese companies moved in to fill the gap heavily investing in the oil and gas sector, as well as many other areas of the economy. As a result, China is now Iran’s main trade partner and number one foreign investor.

Iran is a central part of China’s Belt and Road Initiative, a rail route that now runs from Tehran to Urumqi in western China and there are plans for Chinese-backed high-speed rail lines across Iran. However, many Iranians fear that China has become over dominant and traders grumble that Chinese goods are of poor quality in comparison to European equivalents and there is a belief that Iranian companies were sold too cheaply to Chinese firms in the past.

Iran has looked to rebuilding relations with the West as part of a rebalancing act. The government is also shrewdly forging closer ties with India, which has invested heavily in Iran’s Chabahar Port that will also give India easier access to Central Asian gas and oil.

Geopolitical flashpoints aside, Iran represents a sweet spot in terms of opportunity among frontier markets, bright demographics, largely untouched by foreign investors and with large relatively liquid stock exchange. If the country can overcome internal economic problems and keep its foreign relations on an even keel, it can crystallize into the economic powerhouse it has long promised to become.