Iran firing on all cylinders
In Post-Sanction Iran, President Rouhani won a decisive mandate until 2021 in May. Gaining almost 8mm more votes than the next closest candidate was a strong indication of support for his approach to foreign relations and the ensuing benefit to the population. Despite strong criticism from President Trump over the deal reached by Obama with Iran and the strong distrust of Iran, the country has benefitted strongly in the almost 2 years since over 90% of sanctions were lifted. Most people know that Iran has had sanctions enacted against them, but few know the details. If you are interested in the details, this is a tidy overview.
Iran’s 5-year growth plan from 2016 to 2021 calls for 8% annualized growth, as well as inflation below 10% which has not happened in 25 years. To that end, growth in 2016 was above 7% compared to 0.9% in the previous year. Under Rouhani, significant investments have been made in infrastructure which set the stage for rapid growth. Specifically, internet penetration went from 21% of households in 2013 to 62% in 2016. Similarly, smartphones have gone from 3mm in 2013 to 40mm in 2016 for a country of 80mm.
In Tehran, 91km of subway lines have been added since 2012 and has made the metro the 18th busiest metro in the world. At the same time, Shiraz, Tabriz, Mashhad and Isfahan all have metro lines now. China has also provided financing and construction support for a high-speed rail line between Tehran, Qom, and Isfahan. In addition to $10bn in credit facilities from China, Iran has also received an $8bn line from South Korea. Iran is critical to China’s OBOR initiative. Iran’s infrastructure projects suggest that Iran will have developed country-level infrastructure within the next 10 years.
As Europe lifted sanctions, Iranian banks regained access to SWIFT and locked Iranian capital was suddenly accessible, which has led to a boom in both foreign and Iranian investment within the country. Total has committed $4.8bn to the South Pars project and India’s ONGC has committed $11bn to the Farzad-B field. Peugeot Citroen earlier agreed to produce 200,000 vehicles in Iran and in August, Renault signed a $770mm deal to produce 150,000 cars per year in Iran
The Tehran Stock Exchange has benefitted from sanctions relief, with the market up +38% since sanctions were lifted. The stock exchange has a market cap of $122bn now, with 30 companies with a market cap of $1bn and over 150 companies with a market cap over $50mm the stock market is deep and the market is diversified. The currency has not had as good an experience, IRR is down -13% since sanctions were lifted. The primary reason for this is that Iranians were restricted in the movement of their own capital and there was material latent demand for selling IRR and investing in foreign-denominated assets. This demand has not been sufficiently counteracted by foreign investment for the currency to stabilize. In addition to this fundamental issue, you also have the government monkeying with rates to balance the budget. Iran receives foreign currency for its oil sales, but its budget is in Iranian Rials. The government is also able to manipulate the delta between the official FX rate and the market rate as a way to ensure a balanced budget. From here, we think IRR is highly unlikely to depreciate further than 36,000 per USD. The cautionary note would be for oil falling below $50 a barrel and creating budgetary issues for Iran.
Despite being a very diversified economy, Iran’s energy products constitute 80% of all exports. Compare this to Canada where energy exports are only 32% of total exports. Iran’s diversified industries are primarily focused on the domestic market. Iran is known for it energy reserves and post-sanction growth in production has been a buoy to the economy, with production on track for 3.8mm bpd in 2017, representing more than 10% of OPEC production.
Given a stable government post-election, strong inflows and interest from other countries and a population that is 80mm strong of which 30% is under 30 are the types of fundamental factors that make foreign investors excited. Add to this a literacy rate of 93% and 60% of all university graduates being women and the story of Iran is very exciting.
Iran has been unable to disconnect itself from its wider ambitions of being the global center of Shia Islam. There are an estimated 200mm Shia Muslims globally, of which roughly 70mm reside in Iran. Iran has spent a significant portion of its post-revolution foreign spending towards extending its tentacles across the Muslim world. Focusing on Lebanon, Iraq, Syria, Central Asia, and Afghanistan. Most recently, providing military support and troops to Syria’s beleaguered Assad regime. The net result of this is that the regime makes economically unwise decisions in exchange for wider strategic goals. To be fair, much of this could be argued to be a response to Saudi Arabia’s nearly century-long effort to indoctrinate and pay its way to dominance within the Sunni Muslim world. Saudi Arabia and Iran have an instinctive hate and distrust for one another. Made worse by the persecution of Shias in Saudi Arabia and of Sunnis in Southeast Iran.
The government continues to persecute and stifle freedom of expression, though the situation has undeniably improved under Rouhani, people are still imprisoned for seemingly seditious thoughts or simply for not believing in the version of Islam that the regime subscribes to. This situation will likely only improve with time, but also represents another source of conflict in Iran between the rural and urban voter and the rich and poor voter.
Iran also has a serious drug problem, probably the worst in the world, with up to 3mm of 80mm people chronically addicted to heroin. It has been suggested that this is driven by Iran’s chronically high unemployment rate which has been over 10% for decades. More critically, in rural areas, it is as high as 50% and amongst youth, it is as high as 25%. This creates the perfect environment to cement narcotics addiction. The other impact is a brain drain, where the best and brightest in Iran are strongly incentivized to leave, whether its because of differing religious beliefs, a lack of opportunity, or sanctions it has all resulted in about 500,000 people leaving per year, which is significant for a country of 80mm.
Iran also has a number of corruption issues that it is sorting through, which should not necessarily preclude investment but highlight the need for a local partner that can navigate the challenging waters of corruption and not offend the current government.
One of the challenges with working and assessing risk in Iran is that unlike many countries, the Persian diaspora overwhelming loathes the government. They are 5mm strong and very wealthy and very biased towards the government and its religious tilt. They tend to be strong voices within Western academic institutions and to create a false narrative of the business climate in Iran. For anyone considering investing in Iran, it is strongly advised that you actively seek out both perspectives (supporters and opponents of the government, and religious and irreligious people) for balance and a firm grasp of the country which is very bifurcated between staunchly atheist Persian nationalists and religious Persians. What is important to note, is that for a variety of reasons there are atheists within Iran that support the regime and religious Shia Muslims that do not support the regime.
We are very bullish on Iran and do not think the negatives negate the overwhelming positive story. Iran is a huge country with diverse ecosystems, a long history of economic production and wealth and a people that very much have the mindset of a Turkey or Russia. Certainly, Trump’s actions will have to be carefully watched to measure the short-term impact, but long-term without sanctions it is actually a great time to invest, understanding that your money could be locked up if sanctions are reintroduced.
As always, any questions, please let us know.