Boston, MA -- (SBWIRE) -- 05/08/2013 -- BMI Industry View

We maintain our bearish outlook for Iran's construction industry with a negative forecast of -3% for 2013 due to the persistently high inflation - estimated above 20% between 2013 and 2017 - and continued pressure on Iranian finances following the latest wave of US and EU energy sanctions. We expect this downward pressure to continue largely unchanged until 2015, after which we anticipate a gradual easing and an average annual growth of around 2.7% between 2017 and 2022. However, Iran's business environment remains opaque and difficult to penetrate for any outside investors. China and Russia are, by and large, the only two countries with a continued international presence, yet even this relationship is currently experiencing setbacks.

The Islamic Republic remains in a downward spiral of pronounced risks, including political instability, economic stagnation and social tensions, and we believe the current situation will be unsustainable over the long run. Despite a spike in oil prices, the latest wave of US energy sanctions and EU oil embargo coupled with a ban on London-issued insurance on oil tankers, has taken its toll on Iranian oil production, and consequently the economy at large. With its main avenue for earning foreign currency - oil represents half of the Iranian government's revenues, and account for 80% of the country's total exports - more or less depleted the government will be forced to cut back further on public spending.

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Key trends underpinning the Iranian construction sector:

- The Chinese government has made an offer to build a new freight rail line in Iran, according to Engineering News-Record. The freight line is aimed at allowing continuous rail transport of goods from China, through the Middle East, to Europe. The project is expected to cost US$2bn, starting in Tehran and running to Khosravi on the Iraqi border. Iran's minister responsible for transport is reported to have invited bids to construct the line. That said, we are seeing some setbacks within the China - Iran relationship, when the former recently pulled out of the development of phase 11 of the US$4.7bn South Pars gas field, as well as the US$2bn, 1,500MW, hydro-dam project in Bakhtiari. As a result we now question the viability of the planned US$1.5bn Iran to Pakistan pipeline, which is unlikely to be built without significant Chinese backing.
- The North-South Rail Corridor, an ambitious project to create a freight-rail link between Europe, via Russia and Azerbaijan, through Iran and eventually linking to India and Southeast Asia, took a step forward in October 2012 with the unveiling of a cooperation agreement between transport ministry representatives from Russia, Azerbaijan and Iran.

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