Most multinational companies will need to wait a little longer for Iran, the world’s largest untapped emerging market, to open up to foreign investment unfettered.
International negotiations involving Iran’s nuclear program have been extended once again. FSG maintains our view that nuclear negotiations will continue until a final deal is reached. A collapse of nuclear negotiations would reignite Iran’s uranium enrichment program and restart a cycle of tit-for-tat economic and military escalation, raising the likelihood of outright conflict. Given the high level of global economic volatility, not reaching an agreement is simply too dangerous of a scenario.
MNCs should use extra time provided by the latest extension to prepare for Iran’s gradual opening. 40% of MNCs that we polled are already prioritizing the market. Getting ahead of competitors through advance planning will be critical for taking advantage of the world’s largest untapped emerging market. We’ve already seen strong interest from Western MNCs in the fast-moving consumer goods, medical devices, and pharmaceuticals sectors, all of which are able to operate locally through sanctions exemptions. In recent weeks, we are beginning to see a spike in interest from technology and industrial companies that do not want to miss out on Iran’s long-term opportunity.
For companies already operating in Iran, the extension of talks will not provide a significant boost to the Iranian economy. Tough economic conditions are likely to persist and you should expect relatively low consumer confidence, as well as ongoing price sensitivity among Iranians in 2015. Due to expectations for a sustained drop in global oil prices next year, the government appears ready to balance the budget at a lower oil price, perhaps between US$70 and US$80. Balancing the budget against a lower oil price insulates the economy from risk, but it also limits the government’s ability to put funds toward domestic investment.
Even after an eventual deal, Western policy could send mixed messages about sanctions relief and full economic recovery will take years, so preparation is also critical to mitigate operational risks. In our MENA monthly market monitor, we will be tracking how changing dynamics surrounding the negotiations, such as the possibility of new sanctions legislation proposed by the US Congress or a conservative resurgence in Iran, could delay or disrupt an agreement and further sanctions relief.
FSG clients can read our report on investing in post-sanctions Iran or listen to the podcast to learn how to prepare for the market opening. We also updated the Iran scenarios in our report on Events to Watch in 2015.