Iran: “Resistance Economy” Redefined

MENA Outlook Extended Outline


"Resistance Economy" Redefined

Our regional theme this quarter analyses how Iran has been impacted by the re-imposition of sanctions, lower oil prices and coronavirus (COVID-19). We look at how the country’s relationships will change in the region and internationally, and highlight what we see as we look at beyond COVID-19 to determine risks and potential opportunities. 

  • There is little doubt that new US-led sanctions are taking a toll on Iran: the IMF forecasts growth to be flat this year, but we expect this to be revised downwards given the added impact of COVID-19, which has hit Iran quite hard, slower growth in China and the new oil price environment.
    • The economy contracted by 9.5% last year, surpassing what was already a dire projection of a 6% fall in GDP.
    • Under the previous sanctions on Iran in 2012, the economy contracted by 6.8% and 1.9% in 2012 and 2013, respectively.
  • Domestic risks include delayed structural reforms, which could impact bank and corporate balance sheets, and continued social unrest.
  • Iran will continue to attempt to expand its influence as it tries to become a regional hegemon. Its interventions could continue to fuel conflict via proxies, especially with adversary Saudi Arabia and its allies, but we believe it is unlikely to escalate into direct confrontation.
  • Despite decreased economic activity due to pressure from US sanctions and damage wrought by COVID-19, relations between China and Iran will remain friendly, albeit cautious. With low oil prices, China is likely to remain the financier of last resort for Iran.
  • Iran’s tensions with the US are expected to escalate further as the new conservative parliament convenes in Iran in June, along with a potential conservative presidential victory next year. This will combine with Washington’s “maximum pressure” strategy to deepen hostilities between the two countries.
  • While the EU has not re-imposed sanctions on Iran, it is likely it could do so after triggering the dispute mechanism of the JCPOA nuclear deal earlier this year. Before the new US sanctions, Iran-EU bilateral trade was expected to exceed pre-2011 levels over the next few years. This potential has gone; once accounting for as much as a third of Iran's bilateral trade, the EU-Iran share fell to just 6% in 2019.

In our MENA update, we note that the region's economies are vulnerable to the current global slowdown, but some more than others. We especially outline risks to the major economies -- Saudi Arabia, Iran, Egypt, the UAE, and Morocco.

  • The MENA region has to adjust to the ongoing oil price war in addition to providing adequate stimulus to support domestic economies taking a hit from COVID-19 while also rolling out measures to curb its spread.
  • We expect radical downward revisions to IMF MENA region forecasts imminently, and note this in our analysis.
  • In addition to varying domestic impact, COVID-19 could initially weigh on the MENA region through lower average Chinese energy demand in 2020, as well as interrupted Chinese tourism abroad and disruptions to Chinese supply chains impacting trade flows.
  • The oil price crash, a sharp fall in global growth, and the impact of COVID-19 will put severe strains on both oil and non-oil revenue sources in MENA (including VAT, real estate fees, tourism and trade).
  • The region should brace for this double whammy, which could well leave it in negative growth territory for the year. We are looking at silver linings to share with our members.

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