The message has been ringing across global markets, as countries and companies vie for position to reap the benefits of the growth opportunities they see in this large country. The political role of Iran in the region is by no means undisputed, and its adversaries remain fiercely negative towards its newfound acceptance in global society. Nevertheless, this Middle Eastern pivot is shifting the balance in the region, with economic, political and religious divides contributing to the complexity of the transformation.
A sleeping giant
Iran is the second-largest economy in the Middle East and North Africa (MENA) region after Saudi Arabia, with a GDP in 2014 of US$406.3 billion, according to the World Bank. Its population of around 80 million people is the region’s second largest after Egypt. The economy is characterized by a large hydrocarbon sector, ranking second in the world in natural gas reserves and fourth in proven crude oil reserves. In addition, Iran has smaller agriculture and services sectors compared to the oil and gas sector, and a noticeable state presence in manufacturing and financial services.
The direct benefits from the sanctions relief will take time to be felt directly by ordinary Iranians, as economic activity and government revenue still depend to a large extent on oil revenue (oil income currently supports half the budget) and therefore remain volatile. The economy is also saddled with major structural deficiencies, such as an inefficient public sector, high unemployment and a weak banking and financial sector. These need to be addressed to foster growth and create jobs. Given its size and weight in the region as well as its current weaknesses, the potential upside for both for Iran and the region remains quite significant.
A large, underserved auto market
The Iranian automotive industry is the country’s second-biggest industrial sector after oil and gas, contributing more than 10 percent of GDP.
Figures from the consultancy IHS show that car sales in Iran surpassed 1 million in 2015, and some forecasters see sales volume doubling by 2020.
On top of this, Iranian government expects 56,000 new commercial vehicles to be sold over the next three to five years. An ageing fleet is a key driver of pent-up demand, as Iran’s cars are on average 18 to 20 years old, according to IHS. No wonder that auto manufacturers have been among the first to seek a piece of the action.
Both Daimler and Peugeot have already made agreements to sell their products and invest in research and manufacturing facilities. Other car manufacturers are expected to follow suit. In the absence of Western automakers, shut out by the sanctions, Chinese carmakers have taken the opportunity to build a position in Iran. Chery, Jianghuai and Lifan have doubled their market share, although they still represented less than 10 percent of all cars sold last year.
But it is not only the Western carmakers that have ambitions. The country’s largest auto manufacturer, Iran Khodro, started as an assembly factory for foreign makers, but it has since progressed to develop its own models. It manufactured 177,000 cars in 2015 and has declared an ambition to become a significant exporter to the 400 million people in the MENA region.
Building a country
The outlook for Iranian construction markets is buoyed by the prospect of improving economic conditions. In the short term, however, there is no reason to be overjoyed. IHS sees construction spending growing at 1.9 percent in 2016, with a similar level going forward.
President Hassan Rouhani's administration is actively seeking foreign direct investment (FDI) to improve Iran's ailing economy. As the more conservative factions of Iranian society are wary of Western cultural influence, it is likely that Iran will seek to build closer ties and attract FDI from non-Western countries, particularly those with which it has historically had trade relations.
Sanctions gone – now what?
The outlook for Iranian development is better than it has been for a while, although the low oil price weighs on economic prospects. As a central part of the regional economic environment, Iran can and will exert greater influence. Economically, this could have positive effects. Politically, it may mean a more complex diplomatic territory between a financially weakened Saudi Arabia and religious conflicts abounding across the region. This presents itself as a double-edged sword, in the form of opportunities with a solid dose of uncertainty. How it unfolds will be one of the major stories of the next few years.