Boston, MA -- (SBWIRE) -- 08/23/2013 -- We retain a broadly bearish outlook for the Iranian construction sector in 2013 and forecast a 1.0% contraction in real terms - as a challenging macroeconomic picture, international sanctions and a prohibitive business environment will continue to weigh on the industry's growth prospects over the next months. While an improvement in economic conditions should, over the medium-term, bring some respite for the sector, growth is likely to be modest, averaging 1.4% over 2013-2017. The election of moderate cleric Hassan Rouhani as the new president is expected to have a positive impact on Iran's macroeconomic prospects over the medium term and this represents an upside risk to our forecast. However, the recent de facto devaluation of the rial by the Central Bank will increase the cost of imported construction materials, potentially prolonging the contraction of the industry.

The Islamic Republic remains a country of pronounced risks, including political instability, economic stagnation and social tensions, and we believe the current situation is unsustainable over the long run. Despite a spike in oil prices, the latest wave of US energy sanctions and the 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 accounts for an estimated 56% 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 developments in the industry:

- A challenging macroeconomic backdrop will continue to dampen the outlook for Iran's construction sector over the coming quarters. We forecast Iran's economy will contract by 2.0% in real terms in 2013 and return to growth of 2.9% in 2014. Elevated inflation will also weigh on real industry growth - BMI forecasts inflation to average 26% year-on-year (y-o-y) in FY2013/14 - due to a weakening currency. The Central Bank undertook a de facto devaluation of the rial in July 2013 from IRR12,260/US $ to IRR24,779/US$. This will also have an adverse effect on the availability and cost of imported capital goods, exerting yet more pressure on company profit margins.
- Oil revenues account for a significant chunk of government income, estimated at 55% of total revenues in FY2011/2012. This percentage is expected to fall as a result of international sanctions and this will have an adverse impact on public spending on infrastructure.
- With the exception of Russia and China, foreign interest in Iran's construction sector will remain limited, while constrained government finances, persistent project implementation issues and sluggish activity in the oil and gas sector will continue to constrain growth in industry value.

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