Budget Heading Deeper Into Deficit
BMI View: We project Iran's budget deficit coming in at 6.5% and 7.5% of GDP in FY2012/13 and 2013/14, respectively, up from 4.1% in FY2011/12. While revenues will be constrained by low hydrocarbon exports, current expenditure is set to remain elevated, as cuts to energy subsidies will be less significant than expected.
Iran's parliament approved a US$492bn budget for FY2012/13 in May, approximately 9% lower than the budget for FY2011/12. As revenues will be constrained while current expenditure remains elevated, we forecast the overall budget balance to fall into deficit to the tune of 6.5% and 7.5% of GDP in FY2012/13 (based on the Iranian year which begins March 21) and 2013/14, respectively, up from 4.1% in FY2011/12.
|Deeply In The Red|
|Iran - Budget Deficit|
Revenues To Be Constrained..
We project the value of total hydrocarbon exports falling 21.0% and 16.0% in 2012 and 2013, respectively, due to international sanctions on the country's hydrocarbon sector. As a result, oil revenues, which accounted for 53% of total revenues in FY2010/11, will fall over the next two fiscal years. Conversely, we forecast tax revenues in local currency terms growing 24.0%, above the target of 20% set in the budget draft which was presented to parliament in February. That said, we see the rial depreciating 10.0% compared to the US dollar at end-FY2012/13. As a result, we see total revenues increasing 13.9% in FY2012/13, compared to our estimate of 18.0% in 2011/12.
While Current Expenditure Remains Elevated
While the budget projects capital expenditure increasing faster than current expenditure, we believe that the government will prioritise the latter. On the one hand, as the government will seek to support industries that are affected by international sanctions, fixed public sector investment will most likely increase in the near term. However, as the risk of civil unrest in the country is increasing in the run up to presidential elections to be held in June 2013 (see our online service, June 29, 'Inflation Risks Triggering Protests'), the administration will not refrain from undertaking high levels of social spending. While Iranian President Mahmoud Ahmadinejad had proposed cuts to subsidies on energy and other products to the tune of US$110bn, parliament approved cuts of only US$53.8bn, with economy Minister Shamseddin Hosseini declaring that subsidy cuts will be shelved for the time being. As a result, we project total expenditure growing 24.7% in FY2012/13 and 17.8% in FY2013/14.
|Tax Revenues Improving Fiscal Position|
|Iran - Components of Budget, IRRtr|
We forecast Iran's budget deficit averaging 6.2% of GDP over the 2012-2016 period. Tax revenues will outpace hydrocarbon revenues, as the latter will remain subdued as long as international sanctions stay in place. However, as subsidies will be cut over the next three years, current expenditure will grow at a slower pace. As a result, the budget deficit as a percentage of GDP will gradually narrow over the medium term.