Boston, MA -- (SBWIRE) -- 06/12/2013 -- Despite heightened rhetoric in 2012, 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 follow 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 growth forecasts this quarter, and are projecting the economy to fall 2.3% in real terms in 2013, down from our previous forecast of 0.5% growth, as a result of recent data showing that oil production is continuing to decline at a rapid rate, while several key customers will cut Iranian crude imports further in 2013. Growth will return in 2014; however, we stress that this is largely a product of base effects. The economy remains in the middle 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 25.0% in FY2013/14 (fiscal year running from 21 March 2013-20 March 2014), and 16.0% in fiscal year 2014/15, with the decrease in the headline print in FY2013/14 mainly resulting from base effects. That said, our forecasts are based on official data from the Central Bank of Iran, and we believe that the actual figures could be significantly higher.

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, which would hit the country's economy hard.

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