Iran: Implications Of The Rial’s Depreciation
The Iranian rial hit an all-time low of IRR37,500/US$ on the black market on October 2, a 26.7% drop compared to two days earlier, and well below the IRR18,000/US$ where it was trading in January.
Two main reasons underpin this fall:
- Major decrease in local confidence in the currency, which has been accompanied by spiking inflation and difficulties in getting hold of foreign currency due to international sanctions on Ian’s hydrocarbon and banking sectors.
- Growing loss of credibility of the central bank, whose policies accelerated rather than stemmed the fall of the rial.
Two main consequences will follow:
- Hyperinflation could ensue, which would erode further Iranians’ purchasing power. As a result, risks to our 2013 real GDP forecast of 0.2% contraction are now firmly to the downside.
- Political instability will increase, given deteriorating standards of living. One of the largest demonstrations since the beginning of 2010 took place yesterday in Tehran, which was dispersed by security forces.
That said, an economic collapse is not on the cards at this stage.
- We estimate Iran’s foreign currency reserves to be worth 6-8 months of imports, and, although we believe that shortages of basic goods could increase going forward, we would expect to see the introduction of policies of basic rationing before declaring that an economic collapse is imminent.
- Given that the regime violently repressed protests in 2009, widespread social unrest is unlikely to take place, and no opposition organisation appears capable of channeling discontent towards a political goal at this stage. That said, mismanagement of the economy is bound to become a political issue ahead of the June 2013 presidential election.
Going forward, with the Iranian currency crisis seen in the West as a sign that sanctions on the Islamic Republic are becoming increasingly effective, international pressure on Israeli Prime Minister Benjamin Netanyahu to give sanctions more time to work before Israel decides to mount an open military attack on Iran will increase. This feeds into our core view that an Israeli attack is unlikely to take place in 2012, and it is not inevitable in 2013 either.