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Iran: Market Profile

Picture: Iran factsheet
Picture: Iran factsheet

1. Overview

While hydrocarbons are the dominant sector in Iran and account for the majority of exports, growth in recent years has increasingly been based on non-oil sectors as well as a short-lived recovery in consumption and investment demand. The Iranian economy bounced back sharply in 2016-2017; however, by the second half of 2018, Iran’s economy was under significant negative pressure as fresh economic sanctions undermined investor sentiment, fuelled inflationary pressures and weakened rial. In the medium-to-long term, growth prospects will rely on the pace of Iran’s reintegration with the global economy in banking, trade and investment and the implementation of key structural reforms.

Source: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

July 2015
After years of negotiations, world powers reached a deal with Iran on limiting Iranian nuclear activity in return for lifting of international economic sanctions.

January 2016
International economic sanctions were lifted after the UN nuclear watchdog, the IAEA, confirmed that Tehran had complied with its promises to scale back its nuclear activities.

December 2016
The US Senate approved a ten-year extension of the Iran Sanctions Act, which penalised American companies for doing business with Tehran.

May 2017
Hassan Rouhani won re-election as president.

May 2018
US President Trump announced the US withdrawal from the 2015 international deal on Iran's nuclear programme and the re-imposition of US sanctions on Iran.

Source: BBC country profile – Timeline, Fitch Solutions

3. Major Economic Indicators

Graph: Iran real GDP and inflation
Graph: Iran real GDP and inflation
Graph: Iran GDP by sector (2017)
Graph: Iran GDP by sector (2017)
Graph: Iran unemployment rate
Graph: Iran unemployment rate
Graph: Iran current account balance
Graph: Iran current account balance

e = estimate, f = forecast
Source: IMF, World Bank, Fitch Solutions
Date last reviewed: September 21, 2018

4. External Trade

4.1 Merchandise Trade

Graph: Iran merchandise trade
Graph: Iran merchandise trade

e = estimate
Source: WTO
Date last reviewed: September 21, 2018

Graph: Iran major export commodities (2017)
Graph: Iran major export commodities (2017)
Graph: Iran major export markets (2017)
Graph: Iran major export markets (2017)
Graph: Iran major import commodities (2017)
Graph: Iran major import commodities (2017)
Graph: Iran major import markets (2017)
Graph: Iran major import markets (2017)

Source: Trade Map, Fitch Solutions
Date last reviewed: September 20, 2018

4.2 Trade in Services

Graph: Iran trade in services
Graph: Iran trade in services

e = estimate
Source: WTO
Date last reviewed: September 21, 2018

5. Trade Policies

  • International sanctions have presented the most major barriers to trade growth in Iran. Although Iran has been under sanctions of varying severity imposed by the US since the Islamic Revolution in 1979, these were significantly widened and joined in on by the EU and the UN in 2011 as a response to the country's continuing nuclear programme. Sanctions have had a severe and widespread impact on Iran's economy, specifically targeting the development of nuclear facilities and the procurement of arms, while also including a ban on the involvement of Western companies in the oil and gas industry, the prohibition of oil exports to key developed markets such as the US and EU, and the exclusion of the banking sector from the international finance industry. Even though most sanctions were lifted in 2016, US primary sanctions continued to obstruct international trade by preventing the use of US dollars for transactions with Iran.

  • International trade in Iran has been shaped by the sanctions regime from which the country began to emerge from in 2016. The imposition of sanctions, led by the EU and the US, severely depressed trade volumes for Iran's key commodity export, oil, and prevented investment in the hydrocarbons industry, hindering economic growth. Sanctions have also halted the use of dollars for international trade, and driven the focus of trade flows towards Asian countries.

  • US President Donald Trump’s decision in May 2018 to withdraw from the 2015 nuclear deal has paved the way for the re-imposition of US sanctions against Iran, with the first phase beginning on August 7, 2018. The first round targets Iranian purchases of US dollars, metals trading, coal, industrial software and the Iranian autos sector. The second batch of US sanctions that are set to be re-imposed on Iran will target its banking system and oil exports. These sanctions are expected to be implemented on November 4, 2018.

  • Trade volumes in Iran are dominated by high-value hydrocarbons exports, which are the main drivers of economic growth and the major sources of government income. Import demand in Iran is also largely driven by the oil and gas sector. Iran's vast natural resource wealth nonetheless suggests that potential trade volumes could be far higher than the current level.

  • Trade flows are hindered by considerable average import tariff rates, standing at an estimated 15.2% (in 2016), which is the eighth highest globally. This is partly due to the fact that Iran has yet to become a full member of the WTO, as its membership has been held up by US vetoes and slow progress on accession once its application was accepted in 2005. The Iranian government has traditionally applied high tariffs on imports to protect and encourage growth in domestic industries, but this significantly increases the costs of imported inputs for businesses and reduces Iran's competitiveness.

  • Trade bureaucracy and customs delays are a major hindrance to business activity in Iran. Convoluted procedures significantly increase the times and costs required for international trade, and particularly complicate the import process. The potential for rent-seeking behaviour within the customs procedure adds further difficulties to businesses.

  • The inability to use US dollars for trade transactions significantly increases the difficulty of selling into and operating in the Iranian market, as payments have to be made in EUR or CNY instead.

Source: WTO – Trade Policy Review, Fitch Solutions

6. Trade Agreement

6.1 Trade Updates

Firms doing business in Iran risk severe consequences, after US President Donald Trump’s first batch of secondary sanctions against the Middle Eastern country came into effect in Q318. August 6, 2018 marked the first of two deadlines that the US president gave companies to ‘wind down’ activities in Iran when in May 2018, he announced that he was pulling the US out of the Iranian nuclear deal – officially known as the Joint Co-operative Plan of Action (JCPOA).

The JCPOA was agreed between Iran and China, France, Russia, the UK, US and EU in 2015. While the US has long maintained its tough stance on US persons dealing with Iran, the JCPOA meant that it agreed to lift its so-called secondary sanctions – those that apply to non-US persons and entities engaged in Iranian transactions. Those are the sanctions now being re-imposed.

However, with the EU expected to enforce a so-called ‘blocking regulation’, a statute that makes it illegal for any EU company or person to comply with those US sanctions, EU firms will face significant challenges when it comes to doing business in Iran and complying with the US requirements.

6.2 Multinational Trade Agreements

Active

  • Syria-Iran Preferential Trade Agreement: Syria is not a viable trade partner while its civil conflict continues, and therefore, the FTA is unlikely to offer attractive trading opportunities for many years, even if the war ends.

  • Economic Cooperation Organization (ECO): The partial scope agreement came into force in February 1992. The list of signatories includes Iran, Pakistan and Turkey.

  • Global System of Trade Preferences among Developing Countries (GSTP): The partial scope agreement came into force in April 1989.

Under Negotiation

  • Gulf Cooperation Council (GCC): Iran is reliant on GCC states for imports, which flow through the UAE's better connected ports, and trade will pick up once sanctions are lifted. Iran is currently negotiating an FTA with the GCC.

  • Pakistan-Iran: In December 2016, Pakistan and Iran started negotiating an FTA with the resolve to complete the negotiation process and achieve the objective of enhancing bilateral trade for the betterment of people of both countries. As of May 2018, negotiations were ongoing; however, the aim was to implement the agreement by June 2018.

  • Indonesia-Iran: Indonesia is a large economy that could provide a significant market for Iranian oil exports.

  • Turkey-Iran: Turkey is conveniently located next to Iran, a top-five trade partner for Iran for both exports and imports, which offers a huge market for Iranian hydrocarbons. A successful trade agreement between the two countries would consequently open up considerable opportunities for businesses to take advantage of.

Source: http://syrecon.gov.sy, Fitch Solutions

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Iran FDI stock
Graph: Iran FDI stock
Graph: Iran FDI flow
Graph: Iran FDI flow

Source: UNCTAD
Date last reviewed: September 21, 2018

7.2 Foreign Direct Investment Policy

  1. Iran offers one of the most difficult markets in the world for foreign investors to navigate. To a large extent, this is due to the international sanctions placed on the country, which precluded investment by Western businesses in many sectors, including the valuable oil and gas industry, and continue to severely limit access to financing for firms based in Iran.

  2. That said, FDI inflows have continued during the sanctions regime, particularly from China, while South Korean and Indian firms have also been among the first to secure investment in infrastructure development following the lifting of sanctions.

  3. US-imposed sanctions primarily focused on Iran's economically vital oil and gas industry and its financial sector, specifically preventing Western companies from involvement in the financing of oil exploration, production and refining. Iran's banking industry was excluded from global financial markets through the banning of trade in precious metals from Europe and expelling Iranian banks from SWIFT. By targeting these sectors, in particular, the sanctions imposed a blanket ban on investment in Iran by Western firms. Though most sanctions have now been lifted, US primary sanctions remain in place, causing difficulties for businesses with US interests and preventing the use of US dollars for transactions.

  4. Despite ongoing talks between Europe and Iran aimed at salvaging the nuclear deal and keeping European businesses in Iran, major European companies are already leaving the Iranian market in order to avoid US sanctions.

  5. Ownership of natural resources is confined to the Iranian state. In the oil industry, private investment is restricted to buyback contracts (which allow private firms to provide the capital and expertise required for extraction), and require production sites to be returned to the ownership of the National Iranian Oil Company after the initial set-up.

  6. Foreign companies are required to strike joint-venture agreements with state-owned enterprises in order to invest in some industries.

  7. Foreign investment is currently coordinated under the Foreign Investment Promotion and Protection Act (FIPPA), which was introduced in 2002.

  8. Iran has revealed several measures designed to encourage investment. These include abolishing restrictions on the percentages of foreign shareholding within a company, a three-year residence licence for foreign investors, directors and experts, as well as tax incentives and reduced administrative obligations for foreign investors.

Source: US Department of Commerce, Fitch Solutions

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
Free Trade Zones (FTZs) located at Kish, Qeshm, Chabahar, Aras, Anzali, Maku, Abadan– Visa-free entry for foreign nationals
– Freedom to repatriate profits and obtain foreign currency
– 100% foreign ownership permitted
– Profit tax exemption for 20 years
– Customs duties exemption on capital goods
– Fewer bureaucratic procedures

Source: US Department of Commerce, Fitch Solutions

8. Taxation – 2018

  • Value Added Tax: 9%
  • Corporate Income Tax: 25%

Source: Deloitte 2018

8.1 Important Updates to Taxation Information

The government has introduced a simplified flat corporate income tax rate that is applicable to both resident and non-resident entities.

The personal income tax rate applied to non-resident individuals is much higher than for Iranian nationals, while the tax system also favours public sector workers.

8.2 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax25% on profits
Social security contributions23% on gross salaries (all employers)
VAT/GST9% on sale of goods and services (standard)
Real Estate Transfer Tax
5% on land value (levied on the acquisition of real estate)

Source: Deloitte, Fitch Solutions
Date last reviewed: September 21, 2018

9. Foreign Worker Requirements

9.1 Localisation Requirements

The saturation of the Iranian labour market means that the employment of foreign nationals is not encouraged, and the percentage of foreign workers employed in a company may be capped at 20%. The process of employing expatriate staff is made slightly easier if investment is through the 2002 FIPPA, which allows work and residence permits to be granted for foreign investors, directors, experts and their immediate family members.

9.2 Foreign Worker Permits

Companies wishing to employ foreign workers in Iran for more skilled positions must apply for work permits and seek permission from the Department General for the Employment of Foreign Nationals. Employment permits will only be granted if certain stipulations are met, namely that there is a lack of expertise for the position among Iranian nationals, the foreign national is qualified for the position, and the expertise of the foreign national will be used to train Iranian workers who will subsequently replace the expatriate. Work permits are issued for a period of one year, and cost USD130 to be issued or renewed (a renewal also lasts for one year).

9.3 Visa/Travel Restrictions

Citizens of the US, the UK, Canada and some South Asian and Middle Eastern countries must obtain visas in advance, and independent travel may be limited. Israeli citizens cannot travel to Iran, and citizens of third world countries who have visited Israel may be refused entry to Iran.

9.4 Religious/Cultural Barriers

Restrictions on women when it comes to clothing and social activities can make life challenging for expatriates. Businesses will likely have to offer higher remuneration packages in order to entice skilled expatriates to work in Iran.

Source: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
Not ratedNot rated
Standard & Poor'sNot ratedNot rated
Fitch RatingsNot ratedNot rated

Source: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
117/189120/190124/190
Ease of Paying Taxes Index
123/190100/190150/190
Logistics Performance Index
96/160N/A64/160
Corruption Perception Index
131/176130/180N/A
IMD World CompetitivenessN/AN/AN/A

Source: World Bank, Transparency International

10.3 Fitch Solutions Risk Indices


World ranking
201620172018
Economic Risk Index Rank123/202
Short-Term Economic Risk Score50.454.053.5
Long-Term Economic Risk Score42.547.547.6
Political Risk Index Rank139/202
Short-Term Political Risk Score62.560.860.8
Long-Term Political Risk Score56.354.054.0
Operational Risk Index Rank125/201
Operational Risk Score43.442.643.3

Source: Fitch Solutions
Date last reviewed: September 21, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK

Iran fell deeper into the economic quagmire in August 2018 when the first round of US sanctions came into effect. Moreover, oil exports have started to decline sharply ahead of the November sanctions, which will include secondary sanctions against countries that buy Iranian oil and the country’s banking industry. As a result of rapidly deteriorating economic conditions, much-needed structural reforms and re-integration with the international community will be difficult to effect. Furthermore, fiscal deficits will be sustained over the coming years, primarily on the back of lower oil revenues and gradually increasing spending. That said, Iran's long-term economic outlook is one of the most promising in the MENA region, particularly in the event that the country can secure sanctions relief, against the backdrop of a positive consumer story. However, the inability to fully exploit Iran's enormous oil and gas wealth and a challenging operational environment will keep a lid on real GDP growth over the next decade.

OPERATIONAL RISK

Iran's operating environment is facing considerable setbacks resulting from the decision of US President Donald Trump to reintroduce secondary sanctions, all but ending the nuclear agreement reached in July 2015. While the other signatories to the agreement - the EU, Russia and China - have tentatively agreed to continue upholding it, most improvements to Iran's economy and business environment over the last three years are likely to be erased. Doing business in the country will become more difficult once again for Western firms, while structural risks including obstacles to trade, regulatory restrictions, onerous taxes, stringent labour laws, and widespread corruption are likely to worsen.

Source: Fitch Solutions
Date last reviewed: September 24, 2018

10.5 Fitch Solutions Political & Economic Risk Indices 

Graph: Iran short term political risk index
Graph: Iran short term political risk index
Graph: Iran long term political risk index
Graph: Iran long term political risk index
Graph: Iran short term economic risk index
Graph: Iran short term economic risk index
Graph: Iran long term economic risk index
Graph: Iran long term economic risk index

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: September 21, 2018

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Iran Score43.348.738.351.235.1
MENA Average47.549.348.148.444.1
MENA Position (out of 18)11812912
MENA Average47.549.348.148.444.1
MENA Position (out of 18)11812912
Global Average49.749.850.049.349.9
Global Position (out of 201)12511014089145

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

Graph: Iran vs global and regional averages
Graph: Iran vs global and regional averages
Country
Operational Risk Index
Labour Market Risk Index
Trade and Investment Risk IndexLogistics Risk IndexCrime and Secruity Risk Index
UAE73.8
67.8
79.672.5
75.3
Qatar65.3
63.9
63.1
67.8
66.5
Bahrain64.5
 58.4 68.571.1
 60.1
Oman 63.3 51.0 59.8 66.4 76.0
Saudi Arabia 61.7 63.0 61.8 63.2 58.6
Jordan 58.4 54.9 59.1 59.7 60.0
Kuwait 54.8 52.3 51.7 51.1 64.1
Morocco
 52.9 39.8 62.0 55.2 54.6
Egypt
 47.8 46.0 46.4 53.5 45.3
Tunisia
 46.1 42.3 52.4 46.9 42.8
Iran
 43.3 48.7 38.3 51.2 35.1
Lebanon 42.7 47.9 50.0 40.6 32.4
Algeria
 40.9 44.0 31.7 39.8 47.9
West Bank and Gaza 33.7 46.4 36.8 30.221.2
Libya
 28.3 44.4 26.0 29.313.4
Syria 28.0 42.9 30.0 26.412.7
Iraq
 27.2 43.7 25.2 28.8 11.3
Yemen 21.7 30.6 23.017.3
16.1
Regional Averages
47.5
49.3
48.1
48.4
44.1
Emerging Markets Averages46.8
48.0
47.5
45.8
46.0
Global Markets Averages49.7
49.8
50.0
49.3
49.9

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: September 15, 2018

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Iran

Graph: Major export commodities to Iran (2017)
Graph: Major export commodities to Iran (2017)
Graph: Major import commodities from Iran (2017)
Graph: Major import commodities from Iran (2017)
Graph: Merchandise exports to Iran
Graph: Merchandise exports to Iran
Graph: Merchandise imports from Iran
Graph: Merchandise imports from Iran

Official Exchange Rate HK$/US$, average
7.76 (2013)
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
Source: Hong Kong Census and Statistics Department, Fitch Solutions
Date last reviewed: September 12, 2018


2017
Growth rate (%)
Number of Iranian residents visiting Hong Kong3,253-0.4

Source: Hong Kong Tourism Board


2017Growth rate (%)
Number of MENA residents visiting Hong Kong129,816-0.2

Source: Hong Kong Tourism Board, Fitch Solutions
Date last reviewed: September 21, 2018

11.2 Commercial Presence in Hong Kong


2016
Growth rate (%)
Number of Iranian companies in Hong KongN/AN/A
- Regional headquarters
- Regional offices
- Local offices

Date last reviewed: September 21, 2018

11.3 Treaties and Agreements between Hong Kong and Iran

  • Investment Promotion and Protection Agreement (IPPA) is under negotiation between Iran and Hong Kong
  • Agreement on Reciprocal Promotion and Protection of Investment between China and Iran (entered into force in July 2005)

Source: National sources, Fitch Solutions

11.4 Chamber of Commerce (or Related Organisations) in Hong Kong

Iranian Chamber of Commerce and Investment in Hong Kong & Macau
Address: Unit 1101, 11/F, Asia Trade Centre, 79 Lei Muk Road, Kwai Chung, New Territories, Hong Kong
Email: chamber@irancham.org.hk
Tel: (852) 2151 8681
Fax: (852) 2151 8682

Source: www.irancham.org.hk

Consulate General of the Islamic Republic of Iran in Hong Kong

Address: Unit 701, 7/F, Sun's Group Centre, 200 Gloucester Road, Causeway Bay, Hong Kong
Email: iranconsulate.hkg@mfa.gov.ir
Tel: (852) 2845 8003
Fax: (852) 2845 8007

Source: www.protocol.gov.hk

11.5 Visa Requirements for Hong Kong Residents

Hong Kong residents require a visa for Iran, which remains valid until 90 days from the date of issuance and the maximum duration of stay is 30 days. The passport must be valid for at least six months.

Source: http://en.hongkong.mfa.ir
Date last reviewed: September 21, 2018

Content provided by Picture: Fitch Solutions – BMI Research
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