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Moody's rates Iran foreign currency bonds

NEW YORK, June 10 (Moody's press release) - Moody's assigned a B2 foreign currency ceiling for bonds and notes to the Islamic Republic of Iran and a B3 ceiling for foreign currency bank deposits.

The long-term domestic currency bonds issued by the government were rated at Ba2. The B2 ceiling reflects a weak economic structure that is prone to balance of payments crisis when oil prices collapse.

Iran has rescheduled its bilateral debt twice in the last decade because of a decline in oil prices and the lack of external financing alternatives, which was partly a result of the hostile posture adopted by the United States.

In the immediate future, the balance of payments will retain some of the vulnerabilities that led to those past reschedulings.

The rating also acknowledges that Iran has shown a willingness to regularize its payments and has taken strong economic measures to repay external obligations. Placing Iran in the center of the single-B category also takes into consideration domestic political transformations, which are permitting a reorientation of Iran's foreign policy.

This in turn is leading to higher levels of bilateral external flows -- and possibly even a resumption of multilateral lending -- which could cushion the balance of payments in the event of an external shock. These flows, together with a substantial amount of foreign direct investment into the prolific oil and gas sector, could be the engines of growth beyond the current stabilization period.

This would also set in place the conditions for a more rapid structural transformation of the economy, which policymakers envisage would take place during the Third Five Year Plan (2000/2001-2004/2005). Given President Khatami's recent successes on the home front and abroad, and the cordial reception he has received from Iran's former enemies and detractors overseas, it appears that the likelihood of putting Iran on a new, externally financeable growth path is better than at any time during the twenty years since the revolution.

A broadly based government, a stable political system, and a reform process that is promoting greater democratization will support the transformation of the economy. Undoubtedly, the current government faces considerable obstacles, partly because of entrenched economic and political elites and institutions that utilize the rigidities built into the Iranian constitution to protect their prerogatives.

The most serious shocks would be those intended to set back the process of improved relations with Iran's neighbors and their strategic allies. However, the growing youth component of the population and the ground swell of public dissatisfaction with economic and social stagnation, properly channeled by the current reformist government, appear to be breaking down the resistance of the opposition.

The B2 rating anticipates an uneven process of transformation and some degree of volatility in Iran's external relations. The Ba2 domestic bond rating takes into consideration the generally prudent fiscal policy of the government, even during times of external stress.

This is reflected in the generally low level of domestic debt it has accumulated. However, part of the explanation is the weak capacity of the state-run banking sector to mobilize sufficient resources and the fact that the government was willing to monetize the deficit and as a consequence see inflation rise to double-digit levels.

A reduction in subsidies and the unification of the exchange rate will be essential to put the budget on a stronger footing, along with less dependence on externally generated oil revenues. This will have to await the reforms envisaged under the Third Five Year Plan.


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