Post Nuclear Sanction Iran - qgmca.files. · PDF file04/10/2016 · Global Isolation...

Queen’s Global MarketsA PREMIER UNDERGRADUATE THINK-TANK

Post Nuclear Sanction Iran

Jeremy Brock | Alex Aleksic | Conner Rakhit | Katie Russell | Linna Li

Outlook for growth in one of the region’s largest economies

October 4, 2016

1 Background of Iran’s Economy & Sanctions

2 Military & Political Ambitions

3 Human Rights and Standard of Living

4 Future Economic Drivers & Outlook


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A Brief History: 1960 - 2016Iran Before and After Sanctions

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% G

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Real GDP Growth

1979: Iranian Revolution happens and the US imposes economic sanctions on the nation.

1960/61: Iranian Central Bank was established and an Economic Stabilization Program was implemented and backed by the IMF. 1980: The Iran-Iraq War

commenced; leading to decimation of the country’s economic and social conditions.

1990: The agriculture sector continues to decline and economic hardship in the countryside forces many to move to different cities/countries.

2008: Oil & Gas became the largest industry in Iran and amounted to 55% of Government revenue in ’08; which was greater than tax revenue.

2016: Oil & Gas sanctions are lifted and Iran can once again deal in international markets –adding to the downward pressure on oil prices.

Sources: Iran News

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SanctionsGlobal Isolation of a Nation

Source: UN

• United States of America: Imposed a total economic

embargo on Iran that suspended Iranian imports, dealing

with Iranian financial institutions and largely targeted the

Iranian Oil & Gas industry.

• Japan: Banned investment in Iran’s Oil & Gas industry and

reduced its 10% oil dependency on Iran (Japan was the

second largest customer of Iranian oil)

• India: Enacted a ban on the export of any item that could be

used in Iran’s nuclear program.

• UN Resolution 1737: Suspended the supply of nuclear

materials and technologies. Also froze nuclear assets

related to Iran’s Nuclear program. Iran failed to meet

the requirements of the International Atomic Energy

Agency Board of Governors.

• UN Resolution 1747: Imposed an arms embargo and

expanded the freeze on Iranian assets.

• UN Resolution 1929: Banned Iran from dealing

ballistic missiles and tightened the arms embargo.

• The reasons for the sanctions are rooted from the illicit activities regarding the Iranian Revolution, nuclear program and terrorist financing.

• The Iranian Revolutionary Guards Corps established by the Islamic Republic of Iran was accused of training and funding terrorist organizations in surrounding regions.

• There were allegations that Iran was not declaring all its nuclear activities to the International Atomic Energy Board of Governors and was not complying to the UN Security Council’s safeguard agreement.

Reasons for Sanctions

Economic Sanctions Military Sanctions

Sources: UN

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Implications of The 1979 RevolutionSanctions, War and Hardship

Source: BBC, World Bank, Reuters

Before 1979

• Iran’s economy was traditionally focused on Agriculture and Manufacturing. Industrialization of the nation in the 1960s led to opportunities for growth in the private sector and foreign investment.

• In the 1970s the Oil & Gas industry was rapidly expanding with the rally of global oil prices.

1979 – 2016

• Immediately after the Iranian Revolution, Iraqi forces informally invade Iran commencing the Iran-Iraq War.

• The Economic Cooperation Organization was founded in Tehran in 1985 with the objective of promoting trade and investment opportunities amongst developing countries in Eurasia.

• During the sanction period, Iran was importing majority of its food; causing economic hardship in rural areas and diminishing the Agriculture industry.

After 2016

• Oil sanctions were lifted meaning Iran, a founding OPEC member, can once again deal in international markets.

• Two of Iran’s largest banks that were blacklisted for financing a ballistic-missile program are no longer under sanction and will play a critical role in funding the country’s international trade.

• The lift of crippling sanctions on Iran has opened the gates to one of the world’s last great emerging markets for international trade and investment.

Prior to Sanctions During Sanctions After Sanctions

Sources: World Bank; Reuters

IranPakistanIndiaIraq

A Force for Shia Islam Russia the Ally

Iran’s Military AffiliationsCompelled by Rivalry

Sources: Business Insider, New York Times, Pew Research Center

• Iran is the major political and militant force in the Middle

East that represents Shia Islam

• Resulted in military alliances with Syria, Lebanon, Iraq

and Yemen, where Iran’s military force is used to protect

and represent Shia communities

• Fierce rivalry with Saudi Arabia, a Sunni state

• Iran and Russia are allies in the Syrian war, supporting

the current dictator, Bashar Al-Assad

• Share military intelligence and co-develop military

planning

• Iran uses alliance to challenge the West and regional

powers

Rivalry with Saudi Arabia

• Iran constantly seeks military dominance to challenge

Saudi Arabia’s militant power

• As a result of the nuclear deal, Iran continues to seek new

military advancements that demonstrate its power in the

region

Sources: Business Insider; New York Times; Pew Research Center

World Shia Population by Country

Military Spending

Subtopic

Exporting the Revolution

Regional Military AmbitionsA Desire for Dominance

Sources: New York Times, The World Bank, US State Department, The Independent

• Despite nuclear deal, Iran continues to invest heavily in its

military budget

• 2016/17 Military Budget includes at 90% increase in

military spending compared to next year

o $11.3 billion USD for armed forces

o $5 billion USD for military projects at the discretion of

armed forces

• Iran currently engages in regional conflicts to support the

Shia communities and remove or destabilize Sunni-led

governments

Connections to Terrorism

• Military supports Shia terrorist groups as part of

exporting their revolution to the rest of the Middle East

• Terrorist groups that Iran supports include: Hezbollah,

Hamas, and the Taliban

• The US State Department annual survey of global

terrorism concluded that Iran is the greatest supporter of

terrorism

o The report stated Iran provided: “financial

support, training and equipment to terrorist

groups around the world”

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1988 1993 1998 2003 2008 2013

Perc

ent

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GD

P

Year

Iranian Military Expenditure (% of GDP)

Sources: New York Times; The World Bank; US State Department; The Independent

0%

5%

10%

15%

20%

25%

Control ofCorruption

Rule of Law Voice andAccountability

0123456789

10

Iran Lebanon Yemen Algeria United ArabEmirates

Basel A

MX

Index S

core

Country

Financial Institutions and the Military Political and Economic Corruption

CorruptionIngrained in Iranian Institutions

Sources: Basel AMX, Transparency International, IMF

• Basel AMX Index ranks Iran first for the risk of money

laundering and financing of terrorist organizations

• Financial institutions are controlled by Iran’s

Revolutionary Guard Corps (IRGC)

• IMF warns that Iran’s use of embezzlement and money-

laundering significantly impedes its economic growth

• Lack transparent government

• Judicial and political system are controlled by the office of

the Supreme Leader, Ali Khamenei

• Transparency International ranks Iran 136 out of 175

countries for level of corruption

Index for High Risk of Corruption Transparency International Percentile Rankings

Sources: Basel AMX; Transparency International; IMF

Key Statistics

• High Consumer Price Index (CPI) inflation seen, with a peak in 2012 of 45.1% falling to 12.6% in January 2016• Poverty fallen to 9% in 2013 compared to 15% in 2009, in part because of subsidies changed to direct cash transfers• Education is fairly universal with 87% of the population being literate and the school life expectancy being 15 years for males and

females- 48.2% of undergraduates are females, almost 15% lower than in 2007

• Unemployment at 11.7% with youth unemployment closer to 30%

Standard of Living in Iran How were Iranians impacted by the sanctions?

Source: World Bank; CIA World Factbook

-15.0%

0.0%

15.0%

30.0%

45.0%

60.0%

CPI Inflation

GDP Growth

GDP Growth and CPI

A Demographic Dividend

• The labour market is small at 37% of people actively engaged

• This is much smaller for women, at only 18% of women engaged in the labour market

• Youth unemployment is becoming serious issue with major social impacts, at 26.1%

• 60% of the population is below 30yrs old and the youth dependency ratio is 33.1% in 2015

Rising UnemploymentCan Iran stem the tide?

Source(s): <Insert Here>

Youth Unemployment

• Females have especially difficult time entering the workforce because of social stigma

• To take advantage of Iran’s demographic dividend, structural and cultural changes are needed

• Increased privatization could increased FDI because of transparent partners, and have positive effects on employment

• Investing in programs to ensure proper skills can be acquired by youth can help integrate them into the market

• Cultural barriers need to be broken down to allow women fair access to the job market

Source: World Bank; Trading Economics; United Nations; Nasseri

20%

40%

60%

80%

100%

Young Dependency Ratio

20%

23%

26%

29%

32%

Youth Unemployment Rate

Gender InequalityProgress made on gender equality since 1979

Timeline

1979 Iran Revolution • Focus on consolidation of Islamic Republic• Period of domestic turmoil, political violence, economic austerity, and

international isolation• Role of women was based in religion

1988 General Plan of the System of Education in the Islamic Republic of Iran• Eliminating discrimination• Women participating in education as policy makers• Strengthening political and social insight of girls through education

1993 First Economic, Social, Cultural Development Plan of the Islamic Republic• Improving education for women• Increasing participation in cultural, social, economic, educational affairs

2003 Third Development Plan • Reduce gender gaps in STEM fields• Teach management skills to increase women in decision making roles• Creating employment opportunities

Source: UNESCO

Gender InequalityCurrent Situations

Gender Gap Index 2015

Rank141

(out of 145 countries)

Score0.580

(0.00 = inequality 1.00 = equality)

Educational Attainment 2015

0 20 40 60 80 100

Literacy Rate (%)

Primary Education (%)

Secondary Education (%)

Tertiary Education (%)

Male Female

Economic and Political Participation 2015

0% 20% 40% 60% 80% 100%

Legislators, Senior Officials,Managers

Professional and TechnicalWorkers

Parliamentary Positions

Ministerial Positions

Female Male

“We have no patriarchy nor matriarchy in Islam, what we have is a meritocracy.”

- President Hassan Rouhani

Attention Being Drawn to Gender Inequality

Source: World Economic Forum

Freedom of Expression and Crime Women’s Rights

• Almost 50 journalists and social media activists are behind bars

- Extreme case of a poet who was punished with 99 lashes and 11 years imprisonment for “insulting the sacred”

• Over 270 internet cafés were closed in 2015 for fear that they would threaten social norms and values

• Bahai Community is particularly subjugated based solely on religion with 80 practitioners imprisoned just for practicing their beliefs

• Still impose death penalty and amputations• Law of Qisas can not be overruled by the judiciary

as of 2013

• Women’s rights still lag behind first world states• Parliament is 96.9% male • In 8 months of 2015 there were 40,000 cases of

women being pulled over for not having proper head covering while driving

• Legal marriage age is 13, or younger if the father consents

• Divorce has very strict rules to be granted, and domestic violence is not specifically criminalized

Human Rights IssuesStill a ways to go

Ssourcr: World Bank, 2016, OPEC, 2016ource(s): <Insert Here>Source: Economist, 2016; United Nations, 2016

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2007 2008 2009 2010 2011 2012 2013 2014

Iran Saudi Arabia Iraq

Population Adjusted Executions per Year

0%

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25%

30%

Afghanistan

Iran, Islamic Rep.

Libya

MENA

Pakistan

Seat of Parliament Held by Women

Major Economic DriversWhere do Iran’s Competitive Advantages Lie?

Sources: IMF; The World Bank; Wall Street Journal

• About a third of Iran’s economy is driven by oil and gas,

small scale agriculture and a service sector. There is also a

considerable government presence in the manufacturing

and financial services sector

What Drives Iran’s Economy

Sources: The World Bank; Bloomberg

Achieving Economic Diversity

• Iran is still quite oil dependent; oil makes up a

considerable amount of GDP but is not the only force

driving economic growth.

• However, as Iran gains greater access to export markets

there will be more incentive to increase oil production.

Iran’s relative efficiency and cheap production should

force oil rents/GDP to rise

25.623.6

33.3

10.8

38.7

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

Arab World(Average)

Iran, IslamicRep.

Libya Nigeria Saudi Arabia

% o

f G

DP

Major Contributors to GDP

2015 Oil Rents as a % of GDP

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300.00

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Oil Agriculture Construction Mining Manufacturing Services

QGM 18Sources: EIA; CIA; World Factbook

Global Producers Oil Cost per Barrel

Limited Production as a result of Sanctions

Rising Oil Production Sanctions have allowed Iran to gain ground as dominant player in global oil markets

Sources: IMF; The World Bank; Wall Street JournalSources: Bloomberg; EIA; CIA; World Factbook

• Nuclear sanctions depressed Iran’s access to International oil markets and forced Iran to cut production by over 25% • High prices from 2012 – 2015 was a major benefit for other low cost producers in the region who experienced tremendous economic

growth as a result of high prices

Foreign Direct Investment Removal of nuclear sanctions has increased flow of investments


• The Q1 of 2016 Iran experienced record foreign direct

investment growth

• The financial services sector has benefited the most from the

lifting of sanctions

• There are still political and financial risks associated with

investing in Iran

• The U.S. state department does still not allow American

companies to invest in Iran

Record level Investment

Sources: Bloomberg; Financial Times; US Treasury Department

0 5 10 15 20 25 30 35 40 45

2013

2014

2015

2016 E

Foreign Investment Projects

0 1000 2000 3000 4000 5000

2013

2014

2015

2016 E

Million of USD

Foreign CAPEX

Jobs created by FDI

0 1000 2000 3000 4000 5000 6000

2013

2014

2015

Q1 2016

Immediate Growth

What do the Next 5 Year have in Store?Economic growth will spike but will flatten off and become more moderate

Sources: IMF; The World Bank; Wall Street JournalSources: World Bank; iShares

Mitigating Risk and limited Future Growth

• Iran will see immediate spikes in GDP due to limited access

to oil markets for the past 3 years

• Iranian energy minister, Bijan Namdar, has indicated Iran is

planning to increase production above pre sanction levels to

over 4 million barrels per day. This has shown a formal

rejection of Iran’s willingness to cooperate with a Saudi-led

effort to curb oil production

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100.00

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300.00

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2014 2015 2016E 2017E 2018E 2019E 2020E

5 Year Projected GDP

• It is likely that Iran will see a spike in growth over the

next 1-2 years from broader access to oil markets and

eager investors who have been unable to enter the Iranian

market until now

• We believe few investors will be willing to assume the

additional risk Iranian investment brings

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Iran South Africa Lebanon Nigeria

Per

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Estimated Hurdle Rates

Appendix 1: GDP and Oil MarketsA $7 difference in the price of oil has a 3.5 billion USD affect on Iran’s GDP


Iran’s Exports

Sources: Bloomberg

Sensitivity to Oil Prices

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2009 2010 2011 2012 2013 2014 2015 2016 2017 E

Ave

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/Day

Iranian Oil Production

Price/Barrel (USD) 2015 2016 2017E Addition to GDP

46.00 47.0120 60.7798 70.0748 23.0628

46.50 47.5230 61.4405 70.8365 23.3135

47.00 48.0340 62.1011 71.5981 23.5641

47.50 48.5450 62.7618 72.3598 23.8148

48.00 49.0560 63.4224 73.1215 24.0655

48.50 49.5670 64.0831 73.8832 24.3162

49.00 50.0780 64.7437 74.6449 24.5669

49.50 50.5890 65.4044 75.4065 24.8175

50.00 51.1000 66.0650 76.1682 25.0682

50.50 51.6110 66.7257 76.9299 25.3189

51.00 52.1220 67.3863 77.6916 25.5696

51.50 52.6330 68.0470 78.4533 25.8203

52.00 53.1440 68.7076 79.2150 26.0710

52.50 53.6550 69.3683 79.9766 26.3216

53.00 54.1660 70.0289 80.7383 26.5723

Appendix 2: Determining Country Hurdle RatesHurdle rates are an analysis used to assess the additional risk of international investment


Iran’s Exports

Sources: iShares

𝐻𝑢𝑟𝑑𝑙𝑒 𝑅𝑎𝑡𝑒𝑠 = 𝐶𝑟𝑒𝑑𝑖𝑡 𝐷𝑒𝑓𝑢𝑎𝑙𝑡 𝑆𝑤𝑎𝑝 ×𝑉𝑜𝑙𝑎𝑡𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝐿𝑜𝑐𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 𝑀𝑎𝑟𝑘𝑒𝑡𝑠

𝑉𝑜𝑙𝑎𝑡𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝐿𝑜𝑐𝑎𝑙 𝐵𝑜𝑛𝑑𝑠 𝑀𝑎𝑟𝑘𝑒𝑡𝑠

Country hurdle rates measure the relative risk of a country the associated risk of investing in a country. An investor that is looking

at making an international investment can add the country hurdle rate to their domestic weighted average cost of capital (the

required return on investment projects) to determine what the required return would be on an international investment.

Because Iran is has not been given a credit rating it is impossible to determine an exact hurdle rate. Comparable were found using

their last credit rating (B- or Caa3). The average of three comparable countries was taken to arrive at a proxy hurdle rate of Iran

Inputs Greece Ukraine Venezuela Iranian Proxy South Africa Lebanon Nigeria

Bond Default Spread (CDS) 11.18% 6.00% 35.88% 17.69% 1.11% 3.42% 3.29%

SD (Equity)/SD (Debt)* 2.30 2.30 2.30 2.30 2.30 2.30 2.30

Hurdle Rate 25.67% 13.77% 82.36% 40.60% 2.54% 7.84% 7.55%

*Emerging market ETF's used as approximate

Post Nuclear Sanction Iran - qgmca.files. · PDF file04/10/2016 · Global Isolation...

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