Boston, MA -- (SBWIRE) -- 03/08/2013 -- Core Views

Despite heightened rhetoric, we do not believe Iran's threats to close the Strait of Hormuz are credible. Any cut-off in oil export receipts would hit the economy hard, and the government would therefore be very unlikely to carry through with its threats.

The economy will remain a regional laggard as investment activity stalls following the imposition of a more stringent set of international sanctions on the regime in 2012 and 2013.

The Iranian rial will remain under fundamental downside pressure as households continue to shift their savings into dollars and gold.

Major Forecast Changes

We have revised our real GDP forecasts this quarter, and are projecting the economy to grow 0.5% in real terms in 2013, up from our previous forecast of a 0.8% contraction. Growth will return this year. However, we stress that this is largely a product of a collapse in imports, which highlights a sharp decline in domestic demand. The economy remains in the midst of a crisis, with the outlook for private consumption particularly bleak.

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We have revised down our forecast for inflation, and we project consumer price inflation to average 40.0% in FY2012/13 (fiscal year running from March 21 2012-March 20 2013), and 33.0% in fiscal year 2013/14, with the decrease in the headline print in FY2013/14 mainly resulting from base effects.

Key Risks To Outlook

With confidence in the rial remaining low, risks of a sharp drop in the value of the currency and hyperinflation kicking in remain significant, which would hit the country's economy hard.

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