Iran’s overall ECR score fell by 2.6 points since Q1 2012 to 24.2 in Q3 2012, resulting in a four-place fall on ECR’s global rankings to 143.
This leaves the sovereign deeply embedded in tier five on the rankings – scores of 0 to 35.9 out of 100, usually equated with a credit rating of B- to D – alongside other distressed economies that continue to be politically and economically mismanaged, such as Zimbabwe, Yemen and Pakistan.
Iran’s increasing risk perception comes as economic sanctions imposed by the UN Security Council over its supposed nuclear programme begin hitting Iranian oil exports and its purchasing power.
Oil exports are a main driver of Iran’s economy, accounting for 80% of overall exports. It is estimated by the Organization of the Petroleum Exporting Countries (Opec) that Iran’s oil reserves near 150 billion barrels, behind only Saudi Arabia (265 billion), making it the second-largest producer of oil within Opec. In addition, oil exports account for approximately half of Iran's government revenues.The sanctions that are cutting into Iran’s oil exports are therefore depriving the sovereign of much-needed revenues. Official estimates predict that exports will be around of $55 billion to $60 billion, down from $110 billion last year.
Falling government revenues from oil exports is one reason why the Iranian rial has depreciated to unsustainable levels during the past year. The rial lost a third of its value against the US dollar during the past 10 days, depreciating at a rate of 40% against the US dollar in the past week and 110% in the past year.A recent report by Cato @ Liberty estimates that the “the rial’s death spiral is wiping out the currency’s purchasing power. In consequence, Iran is now experiencing a devastating increase in prices – hyperinflation.”
The vulnerability of Iran’s currency is reflected in ECR’s data, which show that the sovereign’s bank stability and monetary/currency policy indicators are among the lowest of Iran’s economic sub-factor scores.
Iran’s monetary and currency indicator, which is a measure of a country’s monetary-policy effectiveness and exchange-rate risk, scores a lowly 2.9 points (out of a possible 10). This leaves the sovereign ranked 149 globally for monetary stability, only two places above Zimbabwe – a country that is experiencing the second-highest hyper-inflation rates in the world – and two places below Argentina.
Iran’s government finances are also weakening as a result of inflationary pressures and currency devaluations.
Government revenues have fallen as a result of the government’s food and fuel subsidies, which accounted for about a quarter of government spending in 2010. Reuters estimates that the government pays tens of billions of dollars to subsidize low consumer prices for food and fuel.
These subsidies will likely undermine growth prospects, as reflected in the IMF’s World Economic Outlook report, which shows that Iran's GDP will shrink 0.9% this year after 2% growth in 2011, but will expand next year by 0.8%.
Growth projections for next year indicate that the government might be able to temporarily off-set inflationary pressures from its large US dollar reserves and its healthy current-account surplus.
According to the most recent official estimates, the volume of Iran's gold and foreign currency reserves amounts to $109.7 billion in 2011, up from $78.9 billion in 2010, which by some estimates could last two more years, according to Bloomberg.
Iran has the 20th-largest reserves of US dollars globally, which for the meantime could allow the sovereign some much-needed breathing space.
Additionally, Iran’s current-account surplus of 8.71% of GDP is one of the strongest in the world, ensuring that the sovereign will enjoy a small trade surplus of 3.4 % of GDP for 2012/2013, according to IMF estimates.
This would be a substantial drop from 2011 levels, where the government recorded a 12.5% surplus, but these figures suggest Iran might be able to escape a collapse of its economy.