Japan Agrees To Restructure $500Mn Of Iranian Debt
Middle East Economic Survey
VOL. XLII, No. 07
15 February 1999
Following official negotiations in January between the Central Bank
of Iran and the Japanese Government, the Japanese Export Import Bank (JEXIM)
and a group of private companies have agreed to reschedule nearly $500mn
of Iranian debt (the total outstanding in Japanese private credit) in the
form of a loan. The loan offers the Iranians a new repayment schedule whereby,
according to the Japanese newspaper Mainichi Shimbun, payments would commence
in April 2000. While the amount of the finance has been agreed upon by
both sides, MEES learns that the terms of the loan are still being negotiated
and are expected to be finalized before the end of the Iranian fiscal year
(20 March 1999).
Under the latest rescheduling agreement, which builds on the earlier
rescheduling agreement of 1993-94, the finance will be extended to Iran
under a specially created entity which forms an umbrella for the individual
private creditors and which, it is hoped, will facilitate the finalization
of the package. Iran is Japan's third largest oil supplier, providing 10%
of the country's total oil imports. (The UAE supplies 28% and Saudi Arabia
supplies 22%.) Last week, SACE, the Italian export credit agency (ECA),
agreed to the rescheduling of $370mn of Iranian debt (MEES, 8 February)
and Italy's Mediobanca is rumored to have concluded a $500mn finance facility
for the import of Italian goods into Iran with SACE and the Iranian Government
and Iranian banks.
The Japanese facility was finalized following a visit by the Iranian
Foreign Minister, Mr. Kamal Kharrazi, to Japan, where he met with his Japanese
counterpart. A joint statement released after the meeting said that the
two sides "highly appreciated the existing friendly bilateral relations
and expressed their shared resolve to further strengthen such relationships
by promoting dialogue and cooperation at all levels." According to
Mr. Kharrazi, Iranian trade with Japan in 1997 amounted to $4.4bn (an 11%
increase over the 1996 level) and Iranian exports to Japan, the bulk of
which is made up of crude oil (except for $150mn in non-oil exports), reached
$3.556bn. "I hope we will soon have a supportive environment for a
larger presence of Japanese investors in Iran, especially in light of the
reopening of MITI's insurance coverage for medium and long-term investment,"
Mr. Kharrazi said.
As Germany Agrees To Two-Part Package On the German front, following
a bank presentation on 9 February in Frankfurt, the German AKA consortium,
comprising 37 German commercial banks, signed a two-part rescheduling package.
The first part covers the rescheduling of DM1.2bn ($693mn) of existing
short-term debt due this year, while the second involves $210mn of new
pre-financing credits secured by oil contracts. Details on the margin and
the fees were not disclosed. According to German banking sources, the second
facility is partly for the benefit of German exporters and will be used
in part to meet repayment commitments on the DM1.2bn which will commence
in March 2000. The AKA consortium is headed by Deutsche Bank, which led
the negotiations with the Central Bank of Iran and the National Iranian
Oil Company (NIOC).
Bankers close to the agreement, who described it as a "good deal
for the Iranians," said that its signature generated both confidence
and relief. "The package was only concluded after lengthy and intense
negotiations which have dragged on since 24 December 1998," one German
banker told MEES. He also said that the recent conclusion of Japanese and
Italian rescheduling agreements with Iran is likely to have accelerated
the close on the German deal, although there may have been some "behind
the scenes pulling and negotiating" that helped. "The forthcoming
visit of the German Chancellor Mr. Hombach to Tehran would have been a
bit of an embarrassment if they had not come to a conclusion," he
said. Iranian President Mohammad Khatami is also due to visit Germany shortly
another factor which would have favored a swift conclusion.
Iran has also made a request to South Korea's exporters to reschedule
$118mn in overdue trade payments, the South Korean Government and company
officials announced on 4 February. The outstanding sum stems from original
debt of $485mn which was rescheduled in 1994 and 1995. A spokesperson for
Daewoo Corporation (one of the 16 Korean company creditors) said that a
meeting was held on 8 February to discuss the request. Iran is South Korea's
fourth largest oil supplier.
The Governor of the Central Bank of Iran, Dr. Mohsen Nourbakhsh, announced
news of the rescheduling deals on 9 February, saying that Iran had rescheduled
a total of $2bn in foreign debt payments, without specifying the creditors,
and that payments would now be made over the next 33 months instead of
the original 12 months. He also said that Iran's total foreign debt stands
at $23bn. On 22 December 1998, during his visit to Japan, Mr. Kharrazi
said in a speech that the sharp decline in oil prices had created Iran's
problems in arranging budgets and external payments. "However,"
he said, "our successful experience in managing our debts in 1994
and resolving that crisis without resorting to IMF and Paris Club amply
demonstrates our capability in overcoming financial obstacles."
But despite Mr. Kharrazi's optimism, there are concerns that the latest
agreements may be unrealistic and simply an exercise in diplomacy. Many
analysts question the ability of the Iranian economy to service even the
rescheduled agreements. While this ability is partly determined by the
burden that the reschedulings create collectively on debt servicing
Japan and Germany, for example, have given Iran much tighter deadlines
than their Italian counterparts it will also be affected by oil revenues.
Iran has recently published a $157.3bn budget based on what is considered
an optimistic oil price assumption of $11.80/B and ambitious production
implications. To generate its projected oil export revenue of $10.612bn
from crude oil at a price of $11.80/B, Iran would have to export an average
of 2.46mn b/d, significantly higher than the average 1998 level of 2.25mn
b/d (MEES, 8 February). As one oil analyst pointed out, "it is difficult
to see how this will square with their OPEC obligations, which they are
already in breach of." While creditors' confidence in Iran's repayment
ability is reflected in the series of new agreements, analysts suggest
that given the revenue shortfall implications of the current budget and
the subsequent balance of payment pressure the Iranian economy will suffer,
they will probably have to satisfy themselves with simple interest payments.
One banker told MEES: "With the oil price going the way we expect
it to, the Iranians' best interests would be to negotiate for the longest
terms possible. In three years there will be no fundamental change to their
economy. I don't think that this package is helping them a lot." He
added, however, that "it is a good political gesture for Iran."
The latest agreements do at least go some way towards stabilizing Iran's
relationship with its creditors and may even do more. Following a visit
by the Iranian Minister of Economic Affairs and Finance, Mr. Hossein Namazi,
to Japan in December, his Japanese counterpart confirmed the re-extending
of trade insurance to Iran, which suggests that Japan's previous reluctance
to even hint at challenging the Iran-Libya Sanctions Act may be waning.
Further challenges to these sanctions are now emerging from the US farm
lobby, which is putting pressure on the US administration to allow wheat
exports to Iran. Although Iranian Deputy Foreign Minister Mahmoud Vaezi
denied in Iranian newspaper reports on 4 February that his country was
seeking to purchase wheat from the US, saying that there was "no change"
in Iran's policy towards the US, he did refer to the changing position
of many US companies. "They have come to the conclusion that sanctions
against Iran are sanctions again them," he said. The US Treasury Department
is reported to have announced last month that Iran had placed an order
to purchase over $500mn worth of US grain.
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