In the beginning of 2016, western multinationals had high hopes for Iran. It was supposed to be one of the leading growth markets in the Middle East. It was supposed to quickly emerge from isolation to global integration. It was supposed to be easy for multinationals to access this untapped market of 80 million people. Instead, almost two years after the nuclear deal was implemented, the glitz around Iran is waning, with prolonged uncertainty persisting because of President Trump’s hostile stance toward the country.
However, Iran’s fundamentals and strong potential remain attractive for MNCs that are willing to invest their efforts into a high-risk environment, including those that have been present in Iran for years. Doing business in Iran is complicated, and many executives struggle to understand the market. Because of the opaque environment, it is difficult to plan, set targets, and internally align on Iran’s outlook. Several factors drive these difficulties, and executives must be able to identify them and find the right solutions:
- Nuclear deal uncertainty: Accelerated rhetoric and actions against Iran from the Trump administration has heightened uncertainty around doing business in Iran. Trump’s decertification of Iran’s compliance with the nuclear deal, increased effort to impose more non-nuclear sanctions on Iran, and his pressure on other countries to limit their purchases of Iranian oil signal that tensions will not ease anytime soon. Although it is unlikely that US Congress will reinstate nuclear sanctions by its looming December 14th deadline, businesses must still constantly update their contingency plans and ensure secure contract terms beyond this deadline. Trump’s unpredictability means that he could pull the US out of the deal and reinstate nuclear sanctions at any time. To cope with persisting uncertainty, businesses must vigorously monitor developments from several perspectives – policy and legislation coming from the US, EU, and Iran, as well as regional developments in the Middle East that could trigger more hostile action against Iran.
- Assessing and aligning on Iran’s demand outlook: Some executives may be under the assumption that because Iran is emerging from its sanctions period, demand will be booming. However, the reality is that there are still several obstacles that prevent significant demand growth in the market. In terms of public demand, the government has been earning more revenues from increased oil exports, but much of this new spending power may not be going towards an increase in procurement spending; with heightened regional tensions, and an increase in debt from 12% of GDP in 2014 to 42% in 2015, the government will be dedicating more resources to defense and debt payments. Regarding consumer demand, factors such as high unemployment, slow job creation, and low wage growth prevent a quick return to historic levels of demand (consumer spending growth averaged 6.3% from 2000-2010, while FSG expects 3.1% growth in 2018).
- Lack of reliable data: Executives face the challenge of finding reliable data on Iran to help guide their yearly targets. Data from Iran’s recent past is distorted and is not representative of the regulatory and operating environment that exists in the country today. Clear patterns and conclusions from 2011-2015 data cannot be drawn and applied to a forward-looking view because in that period Iran was under nuclear sanctions, creating unordinary economic dynamics. Additionally, poor data collection and lack of coordination between institutions mean that many statistics are incorrect, exaggerated, or contradictory to the on-the-ground reality. To address this challenge, executives need a view that combines existing data with qualitative insights that are pulled from a variety of sources.
- Navigating the reform landscape: Iran is in the midst of planning and implementing several reform measures, and executives must have a clear view on how those reforms will impact their Iran operations. Two key reforms are the exchange rate and banking sector reforms. The government is planning to unify its dual exchange rate system, which will entail a gradual devaluation of the official rate to meet the value of the free market rate. As the currency depreciates, MNCs’ customers and distributors who previously could operate on the subsidized official rate will face increasing costs and pressure on their margins, creating hesitancy in purchases and investments. Secondly, Iran’s banking sector reforms aim to improve data collection and transparency. Successful implementation of these reforms will facilitate ties between Iranian and European banks, making it easier for businesses to obtain financing. The banking sector forms might also make the due diligence and compliance processes easier for businesses.
For more details on Iran’s 12-month outlook and macroeconomic scenarios, FSG clients can access our Iran Market Spotlight here.