Fitch Ratings UK has revised the Outlook on the Islamic Republic of Iran's Long-term foreign currency and local currency ratings of B+ to Positive from Stable. At the same time, the agency has affirmed the Short-term rating at B, stated a press release. ]
The change in Outlook is based on expectations of continued gross domestic product (GDP) growth of between six to seven percent led by the non-oil sector, as well as ongoing current account surpluses and further foreign exchange reserve accumulation.
Even with a forecast modest decline in oil prices in 2004 and 2005, Fitch expects Iran's external liquidity position to strengthen. By the end of the fiscal year in March 2004, foreign exchange reserves are projected to reach $25 billion, and Iran will be by far the most significant net external creditor of any sub-investment grade country.
Gross external debt is under 10 percent of GDP - the lowest of any Fitch-rated sovereign - and external debt service is equivalent to less than five percent of annual foreign exchange earnings.
Fitch indicates that, although the structure of the economy is a rating constraint, reforms focused on reducing the role of the state and fostering private sector competition are encouraging. Protectionist trade policies are being retracted, for example, and exchange rate unification last year marked an end to state owned entities' access to foreign currency at preferential rates.
Economic reforms have become increasingly important within successive Five-Year Development Plans (FYDP), and discussions on the next plan, covering 2005-09, are already advanced. In determining whether to upgrade Iran's ratings, Fitch will assess the new plan's reform agenda, particularly as regards changes to the state-dominated banking sector and improvements in the underlying fiscal position, which is overly reliant on oil revenues.
The agency is also looking for the next FYDP to clarify the role of the Oil Stabilization Fund that was established in 2000. Based on high oil prices, the fund's year-end balance is forecast to increase to $9.6 billion versus $7.4 billion last year. However, large withdrawals for two consecutive years to offset the fiscal costs of exchange rate unification are not consistent with the fund's primary purpose of reducing the vulnerability of fiscal revenues to oil price fluctuations.
International political risks and regional security are prone to change quickly, and will weigh on the sovereign rating through the medium term. Nevertheless, in a better outcome than might have been anticipated, serious conflicts and regime changes in neighboring states over the past year have not proven either politically or economically disruptive for Iran. According to Fitch, to the extent that regional stability improves over time, the international dimension of Iranian political risk could moderate. Even so, relations with the US are not expected to improve, and while the nuclear dispute with the International Atomic Energy Agency has been diffused, it has not been fully resolved.
The short-term focus of Fitch's domestic political assessment is the February 2004 parliamentary elections. The agency believes there is a risk of a setback for the momentum supporting political reform, which already faltered earlier this year when conservative candidates enjoyed widespread success in municipal elections. Voter apathy was evident in a low turnout, and Fitch says this may be a deciding factor in next year's parliamentary result. After the election, Fitch will analyze the prospects for continued economic reform, which, even under a conservative parliament, should be largely preserved in the FYDP. — (menareport.com)
© 2003 Mena Report (www.menareport.com)
