Change in Iran economy to influence Mideast growth

Middle East growth is expected to jump to more than 5% in 2016 and 2017 thanks to a “rapid growth pickup” in the Islamic Republic of Iran, according to the World Bank. “The expected suspension or removal of economic sanctions against the Islamic Republic of Iran—as the largest developing economy in the region– will allow that country to play a larger role in global energy markets,” says the January 2016 issue of Global Economic Prospects released by the World Bank.

According to the World Bank, a potentially pivotal development was the international agreement, signed in July 2015, of the Joint Comprehensive Plan of Action for limitations on Iranian nuclear development. For their part, the five permanent members of the United Nations Security Council, plus Germany and the European Union, agreed to remove and, in the case of the United States, suspend trade and finance sanctions on Tehran.

“The agreement opens the door for reintegration of the country into the global economy and the reinvigoration of its oil, natural gas, and automotive sectors,” the report indicates.

Sanctions could begin to be lifted in early 2016 if the International Atomic Energy Agency (IAEA) indicates that the Iranian government has fulfilled its commitments under the pact. Renewed optimism about the potential of the Iranian economy has already generated a flurry of investment interest by foreign companies.

US Secretary of State John Kerry said Thursday the nuclear deal between Tehran and six powers is expected to go into effect “within few days,” as he confirmed that the Iranian government has so far kept its end of the deal.

Iran Factor

Despite low oil prices—assumed to be $49 per barrel in 2016, broadly at 2015 levels—and several major conflicts, growth in developing countries in the Middle East and North Africa as a group is expected to rebound to 5.1%  in 2016, and to 5.8 % in 2017.

“The predominant reason for the improvement is an expected growth spurt in the Islamic Republic of Iran, the largest developing economy in the region, from 1.9 % in 2015 to 5.8% in 2016 and 6.7 % in 2017,” the report said.

The outlook also reflects slightly higher growth among other oil exporters, especially Iraq and Algeria, and a more modest medium-term improvement among oil importers, from 3.5 % in 2015 to an average of 4 % in 2016-18.

Forecasts assume stabilization of oil prices and an improvement in the security situation in some countries. Crude oil production in Iran is expected to increase rapidly following the removal or suspension of sanctions, by an estimated 0.5–0.7 million barrels per day in 2016, up from the 2015 level of 2.8 mbd.

The potential increase in capital inflows in the post-sanctions environment could help expand exploitation of proven natural gas reserves, which are the largest in the world.
The release of frozen Iranian assets currently overseas will also boost the economy.

The ramping up of oil production over time, contingent upon significant infrastructure repair and investment, could help keep global oil supply high, and prices low, over the medium term.

Spillover Effect

A rebounding Iranian economy will affect neighboring countries within the Middle East and North Africa to varying degrees. A rapid rise in Iranian oil production would dampen growth prospects in oil-exporting countries and improve them in oil-importing countries.

If pre-2010-sanctions trade patterns are a guide, the export opportunities for other developing countries in the region from a rapidly growing Iranian economy may be limited, but perhaps greatest for Lebanon. Lebanese banks have already indicated that they are interested in operating in Iran.

Among other oil exporters, growth in Iraq and Algeria should improve in 2016 and 2017 by a recovery in the non-oil sector, in addition to continued oil sector growth. The baseline assumes that the impact of ISIL on Iraq’s economy will slowly become more limited. In Libya, a UN sponsored political agreement reached at the end of 2015 should allow oil production and GDP growth to recover.

Fiscal deficits among oil-exporting countries, although still large in some cases, will begin to narrow in 2016. The improvement reflects fiscal consolidation following the oil price drop. Iraq’s 2015 budget contained spending cuts (merging of some ministries, government job cuts, and reduction in construction spending) that will help shrink the deficit in 2016.
The growth outlook for the Middle East and North Africa is subject to several major and longstanding downside risks: economic spillovers from conflict; a renewed decline in oil prices; and the absence of progress in living conditions, which could reinvigorate social unrest.

The Iran nuclear agreement could be an upside or a downside risk for the region: upside if economic recovery in the country is faster than in the baseline forecast following lifting of sanctions, and downside if the government’s commitments are implemented more slowly than called for under the accord. Over the long term, the agreement does generate broader risks to oil prices, depending on how fast new investment and technology can be mobilized to tap Iran’s oil and gas reserves.

By Financial Tribune