Bloomberg reported Sunday that the deputy governor of Iran’s central bank said Fitch Ratings, an international credit rating company, made an initial assessment of Iran’s economy last month, but did not indicate when or if a credit rating will be assigned to the Islamic Republic.

Rating companies assess many factors when assigning credit ratings to government and corporate debt. What could Iran’s credit rating be? First, let's look at Iran compared to regional peers like Iraq, Pakistan and Lebanon. Next, we'll look at other oil exporting countries, mainly in Africa. Finally, we will examine some other frontier markets to see how Iran’s metrics measure up.

For this analysis, Gulf Cooperation Council countries are excluded, firstly because Iran is not a member of this group and secondly because these countries, although regional oil producing neighbors, have not suffered the extended period of economic and political isolation in the same way as Iran. (See also: 3 Reasons Iran is Important in 2016.)

Regional Peers

This first group of countries is called “regional peers.” This group includes Iran’s oil producing neighbor, Iraq, which still suffers from a high degree of political instability that is a major factor in its low ‘B-‘ credit rating. Other countries in the region with a high degree of geopolitical risk include names like Pakistan and Lebanon. The table below shows the ratings for these countries.

Country

Fitch Credit Rating

Iraq

B-

Pakistan

B

Lebanon

B

Source: Fitch Ratings

Macroeconomic Indicators

A more detailed comparison of three macroeconomic indicators (Real GDP Growth, Current Account Balance and Government Borrowing) used by rating companies to assess a country’s economic performance provides some clues as to how Iran stacks up relatively speaking.

These charts show four years of International Monetary Fund (IMF) data, one historical and three forecasts. For example, comparing Iran to its closest neighbor Iraq shows stronger real GDP growth, a better trade balance and lower government borrowings in 2017. This initially indicates Iran should be rated at least single-B; also written ('B').

Oil Peers

The next group is called “oil peers.” This group includes other emerging market oil exporting countries, mainly in Africa. This group was chosen because of the importance the oil sector plays in the economic development and the overall size and scope of these countries’ economies. It is also likely these countries will feature in the rating companies' peer analysis.

Country

Fitch Credit Rating

Nigeria

B+

Angola

B+

Gabon

B+

Azerbaijan

BB+

Source: Fitch Ratings

Macroeconomic Indicators II

Looking at the same macroeconomic indicators as before shows how Iran compares to this group of countries.

Exploring this data shows that, compared to this group, Iran’s real GDP growth in 2017 is in line with peers. Other factors like balance of trade and government finances are actually stronger. In fact for all of these factors, Iran is either in line or better than ‘BB+’ rated Azerbaijan in 2017.

Frontier Markets

Finally, we see how Iran compares to other frontier markets like Egypt, Rwanda or Zambia.

Country

Fitch Credit Rating

Rwanda

B+

Egypt

B

Zambia

B

Source: Fitch Ratings

Macroeconomic Indicators III

Again looking at how Iran compares relative to these countries using the same macroeconomic indicators puts Iran in a relatively favorable position.

These frontier market countries are the cutting edge of emerging market investing, so real GDP growth expectations are high as these countries spend to build up infrastructure. It is for this reason that Iran’s real GDP growth in 2017 comes in near the bottom of this particular group using IMF data.

For other economic indicators that are no less important, Iran fares better, specifically when it comes to terms of trade and government financing. Compared to these countries, Iran’s trade is balanced and net government borrowing as a percentage of GDP is at the low end. This is a positive factor for the country’s potential credit rating. (See also: Investment Banks Should Start Developing an Iran ETF.)

The Bottom Line

Many factors go into determining a country’s credit rating, and the decision is made by a committee, not an individual analyst. Overall, Iran seems to fare better than many of these single-B rated countries. Iran also benefits from $125.6 billion in foreign exchange reserves, as reported by presstv.com, which could be used to service the country’s future debt payments. Rating agencies are conservative by nature, however, and are likely to adopt a “wait and see” approach to Iran’s future development. As such, Iran is likely to be assigned a ‘BB-‘ or ‘B+’ credit rating when the time comes.

 

Disclaimer: Gary Ashton is an oil and gas financial consultant who writes for Investopedia. The observations he makes are his own and are not intended as investment advice.

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