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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 TEHRAN STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Economic and Political Environment With healthy oil revenue allowing increased spending, and his adoption of populist approaches to the nuclear as well as social issues, the president is less vulnerable to internal political pressure than had initially been thought. The only serious challenge to his authority comes from fellow hardline conservatives, who control the legislature and the judiciary. Although the radical policies espoused by Mr. Ahmadinejad genuinely alarm more traditional conservatives, Ayatollah Khamenei is likely to maintain his support for the president. Iran's international relations will be dominated by the question of whether international agreement is possible over the development of its nuclear power program. Efforts by Europe and Russia to reach some form of compromise with Iran are likely to continue. There are increasing signs of a desire on both sides to achieve a negotiated outcome that can prevent a build-up of tension and possible moves through successive UN Security Council resolutions towards economic sanctions and even military action. Mr. Ahmadinejad's electoral appeal rested on his advocacy of more equitable economic opportunity–above all, the fairer and more expansive distribution of Iran's oil wealth. This is likely to manifest itself in strong government spending, including steeper increases in public-sector wages and firmer support for conservative-leaning institutions–all policies pursued by the conservative-dominated Majlis. Exceptionally strong oil prices are likely to encourage and facilitate such policies over the forecast period, and with large fiscal and current account surpluses over the near term, these could prevent financing pressures after 2007. However, relatively high spending also carries strong inflationary risks, particularly given threats to the monetary policy framework stemming from efforts by elements within the Majlis to further reduce lending rates–a policy that Mr. Ahmadinejad seems to support. Economic Performance Real GDP growth in fiscal year 2005/06 (ending March 20th 2006) was 6.3%. Growth is forecast to ease to 5.4% in 2006/07, as oil output declines and import expansion, though slowing, remains strong. However, with oil revenue still rising on the back of exceptionally high oil prices, fiscal expenditure growth will stay strong. This in turn will continue to contribute to high levels of private consumption and investment. Overall growth will ease more markedly in 2007/08, as both oil prices and output levels decline. However, oil revenue will remain comparatively strong, resulting in firm, albeit declining, growth in public spending. Investment and private consumption levels will continue to rise, albeit at a slower rate, resulting in a forecast real GDP growth figure of 4.5%. The average rate of inflation fell to 13.4% in 2005/06, from 14.8% the previous year. This decline is surprising, given liquidity pressures, rapidly increasing demand and low interest rates. Despite recent agreements to freeze the price of some goods, inflation is expected to rise in 2006-07 as oil revenue continues to boost liquidity levels. Average inflation is therefore forecast to increase to around 15.4% over the forecast period. Limited monetary policy tools make the task of combating inflation difficult for Bank Markazi (the central bank), leaving it largely dependent on arguing the case for restricting government spending growth. The central bank will continue to allow the rial to weaken in nominal terms over the forecast period, in order to support the competitiveness of non-oil exports. However, in trade-weighted terms the "depreciation" will be much less marked, and in real terms the rial will continue to strengthen against the US dollar. The pace of nominal exchange-rate decline is expected to be little changed, at just over 3%, in 2006/07, leaving the rial at an average of IR9,279:US$1 as the US currency falls only marginally against the euro. The rate of depreciation is forecast to slow to 2% in 2007/08 as the dollar strengthens, leaving the rial at an average of IR9,514:US$1. Given strong inflation, these projections imply considerable real appreciation against the dollar and a broader misalignment of the currency, a trend that will have to be addressed eventually. * Economic Intelligence Unit Ltd., July 2006. Key Information Contacts TSE Services Company www.tsesc.com Central Bank of the Islamic Republic of Iran www.cbi.ir Iranian Chamber of Commerce, Industries and Mines (ICCIM) www.iccim.com Organization for Investment, Economic & Technical Assistance (OIETAI) a division of the Ministry of Finance: www.investiniran.ir 2003-ORIGINS OF GROSS DOMESTIC PRODUCT (%) (a) 2004-COMPONENTS OF GROSS DOMESTIC PRODUCT (%) (a) Services Industry Oil Private consumption Gross fixed investment Public consumption Net external sector Agriculture 32.9 60 50 54.2 48.9 40 35.2 10.8 7.4 30 20 10 0 10.9 -10 -7.1 PAGE 130
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 TEHRAN STOCK EXCHANGE IRAN ECONOMIC CHARTS AND TABLES 2001 (a) 2002 (a) 2003 (a) 2004 (a) 2005 (b) GDP at market prices (IR trn) 671.7 925.9 1,107.7 1,407.9 1,601.7 GDP (US$ billions) 84.8 116.3 133.8 161.4 177.9 Real GDP growth (%) 3.7 7.5 6.7 5.6 5.7 Consumer price inflation (av; %) 11.3 14.3 16.5 14.8 13.5 Population (millions) 67.0 67.6 68.2 68.8 69.7 Exports of goods FOB (US$ millions) 23,904.0 28,237.0 33,991.0 44,403.0 59,736.8 Imports of goods FOB (US$ millions) 18,129.0 22,036.0 29,561.0 36,639.0 42,501.2 Current account balance (US$ millions) 5,985.0 3,585.0 816.0 3,989.0 13,239.4 Foreign exchange reserves excl gold (US$ millions) 16,616.0 (b) 21,409.0 (b) 24,427.0 (b) 32,709.0 (b) 45,209.0 Total external debt (US$ billions) 7.5 9.1 11.6 17.0 (b) 19.3 Debt-service ratio, paid (%) 4.9 (b) 4.8 (b) 4.5 (b) 4.9 (b) 4.8 Exchange rate (av) IR:US$ 7,921.5 7,958.1 8,281.5 8,724.6 9,004.8 (a) Actual. (b) Economist Intelligence Unit estimates. ECONOMIC FORECAST SUMMARY 2005 2006 2007 2008 2009 2010 Real GDP growth (%) 6.3 5.4 4.5 4.0 3.8 3.8 Consumer price inflation (av; %) 13.4 15.3 15.4 15.0 14.2 13.3 Official net budget balance (% of GDP) 3.3 0.1 -0.1 0.1 0.5 1.0 Unofficial gross budget balance (% of GDP) 18.2 16.0 11.3 7.1 5.2 4.5 Current account balance (% of GDP) 7.7 8.5 4.4 0.0 -2.3 -3.5 Commercial banks' lending rate 16.0 16.0 16.0 16.0 16.0 16.0 Exchange rate IR:US$ (av) 9,033 9,279 9,514 9,897 10,593 11,495 2004-PRINCIPAL EXPORTS FOB (b) (US$ millions) OOil & gas 36,827 Petrochemicals 1,431 Fresh & dry fruits 772 2001-PRINCIPAL IMPORTS (CIF) (b) (US$ millions) Transport, machinery & tools 7,565 Chemical products 2,384 Food & live animals 2,106 2004-MAIN DESTINATION OF EXPORTS (%) 2004-MAIN ORIGINS OF IMPORTS (%) Japan China Italy Germany France Italy South Africa South Korea Other China UAE Other 18.5 12.3 8.4 9.6 56.7 7.8 6.0 7.5 54.3 5.8 5.8 7.3 (a) In real terms; Bank Markazi data. (b) Bank Markazi data. Source: Economist Intelligence Unit ViewsWire PAGE 131
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