Détente with Iran: what for the MENA region?

With the international negotiations with Iran about its nuclear programme, the Middle East is at a turning point. A deal is imminent (The interim nuclear agreement with the five permanent members of the United Nations Security Council plus Germany will become a comprehensive nuclear agreement) and this will change a lot of the dynamics in the Gulf region, notably geopolitically and economically.

Mainly, the US relief from sanctions for Iran would be a game changer. For Iran, it would mean a significant upsurge in growth, trade and investment. For the other countries of the region, it means a massive trade and investment opportunity. We could expect a 3 per cent growth in 2015 to 2016, and 6 to 8 per cent in 2016 to 2018 – driven by trade, portfolio and direct investment, both domestic and foreign.

Iran is indeed a regional power, strategically located country with a large population of about 80 million (similar to Egypt), an educated workforce and diversified economy, even if it suffered lately from the sanctions.  Iran also has enormous resources with 18.2 per cent of the world’s proven gas reserves (larger than Russia and Qatar) and 9.3 per cent of oil reserves.  This potential is enormous as sanctions resulted for the last 25 years in a  growth below potential.  With the end of a low international economic and financial integration and inward-looking economic policies in Iran, growth potential for the region is huge.  And with the new leadership of President Rouhani, the Iranian economy has been stabilized (with lowered inflation and improved public finances, even though growth has been negatively impacted by low oil prices).

According to Gulf Business (July 5th, 2015), a removal of sanctions would mean Iran will be able to access and use its estimated $90bn in foreign exchange reserves that would result in “a strong recovery of trade, tourism, oil production and exports.  It would also boost private investment, lead to higher gross domestic product growth and set the basis for macroeconomic stability.”   With renewed investments in the energy sector and Iran’s re-entry into the international oil and gas market, oil prices will most likely be reduced by $5 to $10 (with further consequences for the reorganization of the Organization of Petroleum Exporting Countries and the global energy market).

Of course, notes Dr. Nasser Saidi  in Gulf Business, “to open up the substantial trade, investment and growth opportunities, and fully benefit from sanctions removal, Iran needs to achieve macroeconomic stability. This means undertaking structural, legal and regulatory reforms to ease the cost of doing business and improve the investment climate and investor protection”.  Tehran will therefore need to commit to market-based reforms alongside greater international openness.

The GCC countries, along with Iraq and Lebanon, will be major beneficiaries of this détente.   A post-sanctions Iran will immediately benefit the United Arab Emirates and Oman, as well as major trade partners including China and the EU.   Dr. Saidi states that “the UAE and Dubai as a regional business, trade and financial hub with an active Iranian diaspora and Lebanon’s banking system stand to gain from Iran’s opening.  The capital rich GCC countries would benefit from high return on investment opportunities, while their construction and real estate development companies can participate in infrastructure and development projects”.  Thus a sanction free Iran could mean an unprecedented boom for the region.

 

 

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