Business Climate Instrumental in Improving Risk Assessment
EghtesadOnline: The CEO of the Export Development Bank of Iran says the improved business climate and implementation of the Joint Comprehensive Plan of Action largely contributed to Iran’s long-awaited OECD upgrade.
Referring to Iran’s rating in the country risk classifications of the Participants to the Arrangement on Officially Supported Export Credits (CRE), Ali Saleh Abadi saw the improvement in the ease of doing business as a welcome sign for domestic growth.
In late June, The Organization for Economic Cooperation and Development (OECD) reduced Iran’s risk factor, moving it up one notch from 7 to 6. As the organization puts it, the risk classifications are meant to reflect country risk, which is composed of transfer and convertibility risk (i.e. the risk a government imposes on capital or exchange controls that prevent an entity from converting local currency into foreign currency and/or transferring funds to creditors located outside the country) and cases of force majeure (e.g. war, expropriation, revolution, civil disturbance, floods, earthquakes).
Saleh Abadi believes an improved entrepreneurial climate and the easing of sanctions as a result of the landmark historical deal to be the “two factors having profound effect” on improving Iran’s risk classification.
Iran has improved the environment within which its business dealings take place, he says, but much more needs to be done because the country is a “long way” from being a low-risk country.
“Rules and regulations in many sectors of the economy need to be reviewed and reforms introduced. Regulations supporting investments need to be improved and the bloated bureaucracy reduced to a bare minimum,” he said, banker.ir reported.
He considered the banking reform plan among the most prudent reforms that have taken effect so far, saying there is no other way but to reform the banking system and rewrite onetary and banking regulations, reports Financial Tribune.
“This is because our macroeconomic rules date back decades ago and no significant changes have been made ever since,” he said.
Some officials only care about and want monetary and banking rules to be Sharia-compliant, “while in addition to being Islamic, the rules must be responsive to the everyday needs of the banking system.”
Forex Rate Issue
Saleh Abadi referred to the foreign exchange rates and was of the opinion that a “single rate mechanism” will certainly herald improvement in the business climate and further help upgrade in OECD ratings.
Although he warned that certain prerequisites are crucial to put an end to the multiple exchange rate regime without which the Central Bank of Iran cannot accomplish its goal.
“Parliament should help the CBI in crafting workable regulations in line with modern banking standards”, he added.
Attracting foreign investment will be the most important result of the improved OECD rating, says Saleh Abadi, adding that before entering any country foreign firms first study reports by international organizations and credit institutions to be certain about that country’s risk assessment. “The lower the risk of a country, the more trust foreign investors will put in their decisions to invest,” he said.
Saying that the easier financing of economic projects is another boon of improved risk ratings, he noted, “An improved risk classification will help the government support the economy at a lower cost, because it can borrow at lower interest rates. Even companies and banks can have access to cheaper credit.”
Iran had been expecting a ratings improvement since the lifting of the sanctions in January. When sanctions against its economy were tightened in 2012, the country hit nadir in the CRE ratings. Before 2007, Iran held a rating of 4 and is striving to return to that status.
The EDBI head said in classifications made by international organizations like the OECD, both political and economic factors are at play. “Inasmuch as the business atmosphere, macroeconomic indicators, forex reserves, GDP growth...have an effect on assigning risk rating of a country, the political landscape too is very important. Our country’s several-notch decline during the sanctions era was not a surprise,” he said.