Sanctions-free Iran a positive development for UAE economy
Rising Iranian demand to boost UAE exports and service sectors
Sport media | NikeIran’s economy has entered a new era of sanctions-free trade and economic relations with global economies, opening its doors to new business opportunities.
Despite the current diplomatic tensions between Iran and the GCC, the GCC countries in general and the UAE in particular is expected to benefit immensely from a sanctions-free Iran.
Analysts expect a number of non-oil sectors to benefit, including transportation and logistics, banking, tourism and trade, which should benefit particularly from any strengthening in Iranian demand.
“We expect a broad-based rise in Iran’s imports, including machinery, vehicles, construction related goods, commodities (particularly iron and steel), food, and consumer goods. Iran constituted 16.5 per cent of the UAE’s re-export market in 2014, though this was down versus 2011 (i.e. before the tightening of sanctions in 2012),” said Monica Malik, Chief Economist, Abu Dhabi Commercial Bank.
A pickup in Iranian demand and ability to move funds would also support the UAE’s service sectors, such as tourism and hospitality, as well as its real estate market. Post sanctions, the UAE is likely become the main hub for international companies looking to invest and conduct business in Iran.
Banks domiciled in countries with close ties and trade links to Iran, such as the UAE and Lebanon, but potentially also Western, Chinese and Indian banks, would likely be attracted to Iran’s diversified economy and significant trade flows, according to rating agency Moody’s.
“We anticipate increased longer-term business opportunities for Dubai banks if the Iranian economy opens up, particularly given the private sector nature of the Dubai economy and its strengths as a logistics hub,” said Khalid Howladar — senior credit officer, Moody’s.
Although the banking sector in Iran offers opportunities, physical expansion into the country would pose greater risks, according to Moody’s analysts.
Iran is estimated to have net foreign assets in excess of $90 billion (Dh330.3 billion). Iran will be able to access approximately $50 billion once the sanctions are removed. This amount will most probably be used to upgrade energy sector and used for investment in infrastructure.
“After the sanctions are removed, Iran will be able to invite foreign expertise and be able to import spare parts and equipment to upgrade energy sector. Trade will improve with neighbouring countries, especially Turkey and the UAE,” said Alp Eke, Director, Senior Economist, Global Markets, National Bank of Abu Dhabi.
Economists see the UAE’s (and particularly Dubai’s) non-oil sector as a key beneficiary of any easing of sanctions on Iran. “Any pickup in Iran’s economic activity, which has been severely hampered by the sanctions, should boost trade and financial flows, with the UAE — particularly Dubai — being the main conduit for trade with Iran,” said Malik.
The bulk of Iran’s imports from the GCC, which amounted $37 billion in 2015, were exports from the UAE that were imported via the ports of Dubai. “The UAE is well-positioned to benefit from the expected increase in trade with Iran Dubai can play an important role in facilitating trade and investment in Iran. More foreign companies could be based in Dubai to do business in Iran,” said Garbis Iradian, chief economist, Middle East and Africa of Institute of International Finance.
Iran is a sizeable emerging market, with a population of 78 million and nominal GDP of around $400 billion. Iran’s economy contracted by around 10 per cent in 2012 and 2013 combined (in real terms) as a result of the sanctions, falling oil production, and rising inflation. Iran may well enjoy a period of strong economic growth of some 6-8 per cent per annum in the coming years on the back of the lifting of trade and financial sanctions, with growth supported by pent up demand, the low economic base, and increased export revenues.
Iranian opportunities come with a number of embedded risks too. The ‘snap back’ clause in the deal will result in sanctions if Iran fail to comply with the terms of the agreement. The recent diplomatic spat between Saudi Arabia and geopolitical tensions with Arab neighbours could pose challenges to trade and economic relations between the two countries.
credit to Gulf News