IRR: Gradual Appreciation In 2014

Short-Term Outlook

We expect the Iranian rial to trade around current levels in the unregulated (black) market over the next three months. The currency was trading at IRR30,480/USD in street market transactions on March 16, having remained relatively stable since September 2013. We see such a trend to persist as talks with the West on the Islamic Republic's nuclear programme continue while the economy gradually recovers after two years of recession. We also do not foresee any devaluation of the Iranian rial in the official market, after the Central Bank of Iran devalued the unit from IRR12,260/USD to IRR24,779/USD in July last year.

Core View

Upside Pressures Prominent
Iran - IRR/USD Exchange Rate, Official & Street Market
Iran Currency Forecast, Official Market Rate, March 31 2014
2013 Spot 2014f 2015f
IRR/USD, ave 17,981 24,897 24,700 24,500
IRR/EUR, ave 23,970 34,340 30,875 29,400
Source: BMI, Bloomberg. f=BMI forecasts

Short-Term Outlook

We expect the Iranian rial to trade around current levels in the unregulated (black) market over the next three months. The currency was trading at IRR30,480/USD in street market transactions on March 16, having remained relatively stable since September 2013. We see such a trend to persist as talks with the West on the Islamic Republic's nuclear programme continue while the economy gradually recovers after two years of recession. We also do not foresee any devaluation of the Iranian rial in the official market, after the Central Bank of Iran devalued the unit from IRR12,260/USD to IRR24,779/USD in July last year.

Upside Pressures Prominent
Iran - IRR/USD Exchange Rate, Official & Street Market

Core View

Beyond the next three months, we believe that the Iranian rial will modestly appreciate vis-a-vis the US dollar in unregulated market transactions, and we forecast the unit trading within the IRR27,000-31,000/USD band in 2014. For one, our core view sees negotiation over Iran's nuclear programme continuing over the next few years, with no major breakthrough on the cards and key oil and banking sanctions remaining in place ( see 'Nuclear Talks: Protracted Negotiations Likely', February 26). The unit will remain subject to some degree of volatility stemming from nuclear talks, although not nearly as pronounced as in 2012 and H113. Indeed, the rial gained 3.8% in two days after Iran and the West reached an interim agreement on the Islamic Republic's nuclear programme in November. However, this gains proved short lived. Potential for volatility is likely to increase in July, when we expect Iran and the West to roll over November's interim deal for an additional six months.

Moreover, a gradual improvement in the macroeconomic situation will lead to increasing confidence in the currency among traders. We forecast real GDP growth of 2.8% and 2.9% in real terms in 2014 and 2015, respectively, from a 2.9% contraction in 2013, resulting from improved investor and consumer confidence, more effective macroeconomic management and low base effects ( see 'Back To Positive Territory In 2014', March 28). Importantly, recent consumer price index (CPI) readings point to a gradual decline price pressures, which have been a major driver of currency depreciation in recent years. CPI came in at 23.0% y-o-y in February, the lowest level since March 2012, and we expect the headline inflation print averaging 24.0% in FY2014/15 (fiscal year running from 21 March 2014 to 20 March 2015) from our estimate of 36.0% in FY2013/14.

Inflation Declining In 2014
Iran - Consumer Price Index Inflation & Components, % chg y-o-y

Official Rate To Remain Stable

We believe that the central bank will maintain the official rate near the current level of IRR24,677/USD in 2014. Importantly, another drastic devaluation such as the one in July 2013 could stoke already elevated inflationary pressures. Moreover, Iran is gradually accessing USD4.2bn in oil revenue held in foreign banks under the current interim agreement, increasing the central bank's ability to maintain the exchange rate.

POSSIBLE SCENARIOS As diplomacy advances
Event Chance Timeline Summary
Core Scenario: Gradual Improvement 45% 12 - 36 months Strong incentives to remain at the negotiating table lead to protracted negotiations. Potential for reaching a long-term agreement is significant.
Scenario 2: Breakdown 30% 5 - 18 months Mutual disagreements cause talks to derail, with risks of a military intervention by the US and Israel in Iran coming back to the fore.
Scenario 3: Breakthrough 25% 5 -18 months Public support for talks in Iran contribute to reaching a 'permanent' agreement, paving the way for a subsequent easing of sanctions.
Source: BMI

Risks To Outlook

The value of the rial will be highly susceptible to developments in negotiations with the West on the country's nuclear programme. We see a 30% chance that the huge challenges associated with the nuclear issue could cause talks to derail in 2014 or 2015, which would potentially lead to a sharp drop in the value of the currency and another official devaluation. On the other side, we give a 25% chance that talks will result in a major breakthrough over the coming 5 to 18 months, paving the way for a significant appreciation in the value of the unit.

Read the full article

This article is tagged to:
Geography: Iran
×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.