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Iran growth forecasts cut but Gulf trade could rally

Saudi Arabia's King Salman bin Abdulaziz Al Saud Reuters
Iran has invited Saudi Arabia's King Salman bin Abdulaziz Al Saud to the country after the normalisation of relations, which analysts believe may offset the effects of US sanctions
  • Fitch downgrades Iran’s GDP growth prediction to 2.3%
  • Saudi Arabia expects to invest in Iran “very quickly”
  • UAE is Iran’s top non-oil trade partner in GCC

Growth forecasts for Iran’s economy have been cut as analysts see US sanctions remaining in place “for the foreseeable future”, but expanding trade with the UAE and improved relations with Saudi Arabia may help to cushion the blow.

Fitch sees growth slowing to 2.3 percent in 2023-24 from a previous forecast of 5.8 percent because analysts believe that nuclear talks will remain stalled and sanctions will continue to hit exports.

“The enduring sanctions will affect all segments of Iran’s economy, but the effect will be felt most substantially in exports, as sanctions will prevent the return of Iranian oil to the market,” Fitch said in a new research note.

S&P added that optimism was raised in 2022 for a renewal of the Joint Comprehensive Plan of Action (JCPOA), abandoned by the Trump administration in 2018, but the Iranian government rejected an agreement brokered by the EU and talks have since hit the buffers.

The deal was designed to neutralise Iran’s nuclear activity, while still allowing the country to enrich uranium to generate electricity. But Donald Trump’s decision led to Iran’s crude exports plummeting from 2.7 million barrels per day in May 2018 to just 0.3 million in January 2023. 

Fitch also lowered its forecast for growth in Iran's investment activity, saying sanctions will continue to prevent international investment into both the oil and the non-oil economy.

Analysts added they expect this to be “somewhat offset” by increased investment prospects from GCC countries after Saudi Arabia and Iran agreed in March to normalise diplomatic relations. 

Iran has invited Saudi Arabia’s King Salman bin Abdulaziz Al Saud to visit the country after the regional rivals agreed to end years of hostility following the China-brokered agreement.

Saudi finance minister Mohammed Al Jadaan said the kingdom’s investments into Iran could happen “very quickly” and last week it was reported that new air routes between the two countries were being discussed.

Farzad Piltan, the west Asia director at Iran’s Trade Promotion Organization, said last week that $1 billion of trade could be achieved in the short term, doubling in the medium term with a focus on steel, saffron, carpets, cement and dried fruit.

Historically, one of Iran's main trade partners has been the UAE, which is home to 400,000 Iranian expatriates, but the reimposition of sanctions halved bilateral trade to $7 billion in 2019. 

Nonetheless, according to the latest data released by Iran’s Customs Administration, the UAE was Iran’s top non-oil GCC trade partner in 2022. Over 20 million tonnes of products were traded worth over $19 billion, up 17 percent on 2021.

A business delegation from Iran visited the UAE earlier this year and a series of meetings was held in Abu Dhabi to discuss the potential for closer collaboration in sectors such as energy, transport and tourism.

Earlier this month, trade prospects were raised further when Iran appointed an ambassador to the UAE for the first time since 2016.

According to geopolitical intelligence platform Foreign Brief, both countries are keen to expand the relationship, with ambitions to increase trade to $30 billion by 2025.

Alex Vaillancourt, an analyst focusing on the Middle East, said in a research note: “Economic ties between the UAE and Iran are likely to continue deepening.

"Emirati firms have expressed significant interest in Iranian resources such as gold, diamonds, metals and metallic raw materials, and it is likely that in the near future they will step up investments in the extraction industry.

“Similarly, the UAE is likely to continue increasing its exports of manufactured goods to Iran - re-exporting goods to Iran has become a major industry.”

The UAE is a major re-export hub, meaning that Iran sources goods from a number of countries from suppliers in the UAE.

Joshua Krasna, a senior fellow in the Foreign Policy Research Institute’s programme on the Middle East, added that Emirati foreign policy shifts in the past two years have led the UAE to “accelerate its re-engagement with Iran”.

He added: “The two countries are significant trading partners: the UAE was Iran’s primary link to the global economy under sanctions, and in 2020 was the largest exporter to Iran after China.”

In its report Fitch said private consumption in Iran will also take a hit as faster inflation – set to average over 42 percent this year compared to a previous forecast of 23 percent under a return to the nuclear deal – will further erode consumers’ purchasing power. 

In 2022 the inflation rate of 42.4 percent put Iran 10th in the world in terms of rising prices, according to research platform Economics Observatory.

Fitch added that it expects the Iranian riyal’s value to weaken by 20 percent in 2023.