This month, Rouhani was re-elected as president of Iran with 57% of the votes, hereby clearly defeating Ebrahim Raisi, who entered the race as a surprise contender in April. Raisi was thought to have the support of the Revolutionary Guard, the cleric and of Ayatollah Khamenei. With his re-election, Rouhani dealt a clear blow to the conservative forces in the country. He won due to his economic track record but also by promising more openness towards the west and by promising greater social freedom. It will be difficult to deliver on these promises, given that he has only limited control over them. Allowing greater social freedom will depend on the appointed clerics and on the judiciary. Openness towards the West will mainly depend on the how far the US will go with regard to its aim of isolating Iran. During his recent trip to the Gulf, the US President increased pressure on Iran by calling on “all nations of conscience to work together to isolate Iran”.

Impact on country risk

In 2016 Iran enjoyed a post-sanctions boom (with 6.6% real GDP growth) driven by a recovery in oil production and exports. This led to an increase in public expenditure and private investments. For 2017, economic growth is expected to be 3.3% and beyond that it is projected to stabilise at around 4.5%. This growth recovery was one of the factors that led to Rouhani’s election victory. During the campaign, one of Raisi and Ayatollah Khamenei’s main criticisms was that ordinary Iranians have not noticed this improvement in the economy. This is partly true. On one hand Rouhani’s policies have, for example, significantly reduced inflation and led to an increase in FDI. However, on the other hand, we see that private consumption in Iran was still contracting and unemployment increased in 2016. There also remain major (historical) constraints on growth. The two most important ones are, first of all, the Iranian banking sector which is in very bad shape and unable to support the recovery. Banks are strongly underfunded and their balance sheets are burdened with a high share of non-performing loans. One of Rouhani’s priorities will therefore have to be the new banking law that is expected to go before Parliament in June. The new law is expected to implement increased regulatory and supervisory powers of the Iranian Central bank over the banking sector, introduce asset reviews, etc. Reforming the banking sector will lead to increased lending and help supporting growth. Secondly, the poor business climate is constraining growth. This is shown by the fact that Iran scores very low in almost every dimension of the World Bank’s ease of doing business indicator. Dealing with this will be a very complex and difficult process for the Iranian government. Higher growth will also be needed to provide enough jobs for the estimated half-a-million people entering the job market each year and in order to reduce high youth unemployment (30%), which is creating discontent. Nevertheless, Iran’s economic outlook remains positive. It has a relatively diversified economy compared to the other oil exporters, almost no external debt and a solid current-account surplus. The country risk therefore remains driven by the political risk. With regard to tensions with the US, President Trump has this month renewed the nuclear sanctions waiver that expires every 120 days. However, at the same time, he has again imposed additional sanctions relating to Iran’s ballistic missile programme. This process is expected to go further and more sanctions outside the nuclear programme to be imposed but the nuclear agreement itself to be respected. Also, regional tensions are currently rising, as was visible during Mr Trump’s recent visit to Saudi Arabia. With his comments, Mr Trump further reduced the chances of a regional detente between Saudi Arabia and Iran.

Analyst: Jan-Pieter Laleman, jp.laleman@credendo.com