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Iran Commercial Banking Report Q1 2008Product Type: Market Research ReportPublished by: Business Monitor International Published: March 2008 Product Code: R302-2386 Description From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) foreach of the countries surveyed by BMI. This will permit a more systematic and comprehensivecomparison of the conditions within the banking industries of the various countries than was possible inthe past. For each country, it will also facilitate a comparison of the conditions within the banking sectorand conditions prevailing in other sectors.Iran’s overall CBBER at 46.0 is towards the lower end of the countries in the Middle East and Africaregion that are surveyed by BMI. This score is underpinned by a solid if not spectacular score of 54.4on the heavily weighted banking market structure element of the limits of potential returns element.This reflects the scale and entrenched position of the Iranian banking system within the economy, whichis comparatively large for the region rather than at a high level of development. In particular, the banking market structure elements of the limits of potential returns have aconsiderably higher score than the country elements (54.4 versus 38.7). On the other hand, the bankingmarket elements of the risks to the realisation of returns are much less than the than the country riskrating (13.3 versus 59.4). In other words, although well-positioned within an economy that is strong onaccount of the currently high price of oil, the banking sector, rather than the economy more generally, isthe primary locus of risks to its own further development. This is because the banking system is bothnot well regulated and very underdeveloped, constrained in particular by a small deposit base - a largeportion of the domestic deposit base being held abroad - and under-used asset base on account of a lowloan to asset ratio. Hence although Iran is a country that is comparatively large and experiencing stronggrowth, there are nonetheless not particularly high prospects for banking system growth. This isreflected in the comparatively low scores for the region for each of the non-market structure scores, inparticular market structure based risks to potential returns. We maintain our bearish outlook for the Iranian economy, and see no improvement in policy under thecurrent administration. External pressures, domestic policy imprudence will continue to take a toll on theeconomy. The economy should expand by 5.3% in 2007 in real terms, backed by government spending,slowing to 4.8% in 2008 as inflationary pressures, ongoing political uncertainty, and macroeconomicmismanagement under the Ahmadinejad administration take their toll. High crude oil prices should helpcushion the blows to the economy from the domestic and external forces mentioned - we see the OPECbasket averaging US$58.5/bbl in 2008 - by providing ample funds with which to stimulate activity,although this is by no means a sustainable policy course. As such, we see growth beginning to slow from2008, dipping below 5%. At this point, the risks to our forecasts are to the downside, at least under thecurrent administration. While the oil sector contributed 11.0% of GDP in 2005 (2006 figures are yet unavailable, although ourestimate is 10.3%), it accounted for around 80% of total exports and a significant proportion of budgetaryrevenues. As such, slower growth or contraction in the sector is likely to reverberate across the economy,particularly if it translates into lower government spending levels. It is not just external pressures that areaffecting the oil economy. Given the President’s penchant for populist policies such as decreeing interestrate cuts in order to provide cheap credit, as well as his use of Oil Stabilisation Fund money to finance hisspending splurge, this does not bode well for the future of the economy. Inflation is another source of riskgiven the negative impact it has on demand as a result of higher costs. The consumer price index measureof inflation eased slightly in the month of Khordad (May-June 2007) to 16.1% year-on-year (y-o-y) whileproducer prices also fell slightly to 15.2% y-o-y. Still, we maintain our end-year 2007 estimate of 20% onaccount of robust money supply growth, 39.4% y-o-y in 2006, according to reports, the recent cut ingasoline subsidies and rising rental and food costs. While Iran has lived with high inflation for anextended period, price rises will increasingly take a toll on consumer and business sentiment, particularlygiven dire trajectory the economy is taking under the current administration. Table of Contents
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