A memorandum of understanding (MoU) is merely a non-binding agreement outlining requirements and responsibilities. And the Iranians who decisively voted for the re-election of Hassan Rouhani on May 19 cannot be said to have got much more than an MoU on economic progress out of their president. Though Rouhani may have dressed up his ambitions for voters with alluring language – what candidate doesn’t? – Iran’s situation is far too precarious for him to have, de facto, promised anything more advanced than this first stage in the formation of a formal contract.

The obstacles that lie in the way of turning Rouhani’s letter of intent into a binding agreement on which he can deliver remain formidable. As it happens, to understand that point you only have to look at how so many of the numerous deals that the Iranians day by day announce with foreign investors are themselves no more than MoUs. 

Things can hardly be otherwise. As long as the Trump administration remains hostile to Iran, maintaining restrictions essentially cutting it off from much of the world financial system by forbidding the dollarisation of transactions, the economic advance can only be incremental. Then there’s the fact that the White House now has the November 2015 nuclear deal under review; any foreign investor worth their salt is not going to dismiss the real possibility that swathes of sanctions could feasibly be on their way back (especially if there is a military encounter in Syria), cutting the ground from beneath the feet of those who’ve been brave enough to move from intent to action.

Making it worth the bother

Though some in Iran say they were always confident the centrist and pragmatist Rouhani would brush aside the hardline challenge of Ebrahim Raisi - citing opinion polls such as those put out by the US-based International Perspectives on Public Opinion (IPPO) group which over a long period of time gave the president a clear lead - there was genuine nervousness that he might be threatened by a low turnout. As it happened, there was a turnout to be celebrated, 73%, but the Rouhani camp had faced a struggle to explain to people why they should bother turning up at the polling stations when so few of the economic gains delivered by the nuclear deal had got through to them. 

The removal and waiving of nuclear sanctions have done much to unleash Iran’s mighty oil, gas and petrochemical sectors. Back in February, an IMF snapshot detailed how in the post-nuclear deal era real GDP in Iran had grown by as much as 7.4% – but more pertinently for the low to middle-income Iranian, it showed how expansion in the non-oil sector had not got past a wretched 0.9%.

During Rouhani’s first term, inflation dropped from the highs of approaching 40% seen under his populist hardline predecessor Mahmoud Ahmadinejad to the single digits, but unemployment remained on the rise and intractable. By late May it was officially, and conservatively, given as 12.4%, while joblessness among the 15-29 demographic – a crucial consideration in a country where 50% of the 80mn-strong population are under the age of 30 – was put at 25.9%.

It would thus be no surprise to discover a huge amount of voters saying they were sorely tempted to vote for Raisi and his pledge to splash revenues on massive benefits handouts. But when it came to the election day crunch, the consensus turned out to be that Rouhani, backed by his team of largely US-educated ministers, should be given a chance to finish what he had started. The mandate secured, just what needs doing to hike GDP growth to over 8% and at least stop frustrations with the slow pace of economic change from boiling over?

Beleaguered banking

A good place to start is with the beleaguered domestic banking system. Many of its banks are still haemorrhaging money. On May 27, it was reported that the central bank is looking to merge lenders weighed down by bad debts in order to meet international debt reduction standards. The central bank’s governor said that the consolidation would be necessary under the new Rouhani administration to enable Iran to reconnect with the global banking system.

Many of the vast amount of non-performing loans (NPLs) strung around the necks of state banks, as well as some private banks backed by governmental entities, are down to the loose lending policies permitted under the Ahmadinejad government. Today’s borrowers are contending with an obscenely high benchmark interest rate of around 18% and many who apply for a loan are told to find collateral way beyond their means. The banks, meanwhile, are panicking about plans to push down interest rates. As in 2013, some may refuse to do so for fear of triggering a total collapse in savings.

Incredibly, one thing Rouhani has failed to do so far is liberalise the woefully inadequate mortgage market, solely managed since 1979 by Maskan Bank (“Housing Bank”). The market doesn’t meet the needs of contemporary Iranians in the slightest. The weak demand for property in the past few years demonstrates this. The number of construction permits issued in 2015/2016 fell 45.5% y/y while Tehran is strewn with half a million properties that remain vacant because builders and sellers are unwilling to drop their asking price. Once more, the problem is the lack of available credit. A Maskan Bank mortgage is only likely to cover one-tenth of the value of a property in an average Tehran suburb.

In his set of “developmental economic policies” released during his election campaign, 68-year-old Rouhani says the banking sector’s deficiencies are to be partly addressed by promoting the Central Bank of Iran’s (CBI’s) supervisory role, improving government fiscal discipline, introducing appropriate monetary policies and improving the business climate for lenders. Reforming the banking sector to the extent that it can be satisfactorily reconnected to the world financial system will require compelling Iranian banks to adhere to the Basel III international capital standards, deliver real transparency and regulatory compliance and introduce a regulated approach to extending loan facilities. But it is an open secret that in all of these areas Iran is way behind schedule.

The Rouhani financial team also needs to play catch-up when it comes to promoting capital markets and meeting commitments made to the Financial Action Task Force (FATF), the global standard-setting body for anti-money laundering and combating the financing of terrorism (AML/CFT). With the former, the development of nonbank financial resources will spur money market competition and pressure banks to offer more reasonable terms to entrepreneurs and industrialists. In terms of the latter, a better bill of health will be indispensable if Rouhani is to stand any chance at all of talking Washington around to easing non-nuclear sanctions.

IRGC an economic powerhouse

Other challenges for the re-charged Rouhani administration including fighting corruption (results were far from acceptable during the president’s first term), ensuring the private sector has a more level playing field to compete with the business activities of semi-state institutions (the Islamic Revolutionary Guard Corp, or IRGC, amounts to an economic powerhouse, with some estimates showing it controls up to half the economy through front companies), financing an overhaul of the country’s ravaged infrastructure and maintaining momentum in the delivery of internet infrastructure fit for purpose. In tackling all of this, the government must keep in mind that the private sector is now creating around 85% of new jobs.

The challenge is not for the faint-hearted. The IRGC, stung by the heavy defeat suffered by hardline candidate Raisi, may be especially resistant to changes that could undercut its economic hold. And then there’s the news coming out of the US, where the licences that enable Boeing to deliver aircraft to Iran have gone under review. Discouraging, but there again, if you drill down into the slow but sure domestic economic evolution there are some encouraging signs.

Foreign investors are taking a punt, for instance on the car industry. As recently as May 9, several foreign automotive companies - Italian auto designer Pininfarina, German engineering company Mahle, Holland’s Punch Powertrain, South Korea’s Hyundai PowerTech and Austria’s Benteler transmission company - signed up for the development of a new national car platform. Real estate may not be a big draw for Iranian spending as yet given the lack of finance on offer, but smaller purchases, such as a shiny new Renault or Chinese SUV, may be the ideal entry point for many companies to turn a buck.

Iranian automakers assembled 64,574 units in the first calendar month of the Iranian year (which started on March 20), achieving 23.9% growth y/y, quite a remarkable figure considering the industry was in decline only two years previously. Peugeots and Citroens are other famous foreign brands rolling off local assembly lines and then there are deals such as an MoU signed by TAM Co., a parts subsidiary of largest Iranian automaker Iran Khodro (IKCO), and Germany’s Siemens on May 28 for industrial upgrades.

Highlighting the viable outlook for the car industry, recently leaked figures showed that a Chinese firm constructing cars in Iran was selling 70% of vehicles on finance and the rest for cash. The Chinese hold an advantage over the Iranians in that they can charge double what they ask in China for a car, thus by extension with the profits from the first sale they can base the next on finance.

Economic forecasters can find further optimism in the fast-moving consumer goods (FMCG) market, which has grown along with the rise of supermarkets in the country. So much so that in recent months foreign hard discounters such as Turkey’s BIM have begun eyeing Iran for expansion. 

The only existing foreign food retailer in the country, with nine stores to date, is owned by France’s Carrefour. It arrived as part of a JV with local chain HyperStar more than 10 years ago and has consolidated its position as the country’s high-end supermarket chain. That helped to expand the idea that change is actually happening on a day-to-day level for both the working and middle classes of the country. More thin evidence, perhaps, but in keeping Rouhani in office, the Iranians clearly believe they have something to hold on to.