Describing the agreement signed between the 5+1 powers and Iran over its nuclear developments as “historic”, Tundra Fonder, the Swedish boutique has commented that the deal represents a significant opportunity for its Pakistan fund.
For Iran, the deal means that it will see billions of dollars worth of restrictions on its economy easing, in return for stopping its nuclear weapons programme.
“As a result, the conflict between the US and Iran will be reduced and will have positive implications not just for Iran but also for some of the country’s trading partners and neighbours,” Tundra said.
“One of these is Pakistan, and as the oil price falls or at least is kept at a low level, this neighbour in the southeast will benefit. Remember that Pakistan is a net importer of oil.”
Tundra believes the biggest impact of the deal will be in the international oil market. As a member of Opec, Iran has the organisation’s third largest reserves of oil; its estimated reserves of 157.5 billion barrels are exceeded only by Venezuela, 399.9 bn bbl, and Saudi Arabia, 266.6 bn bbl. Iran’s share of global oil reserves is 10.6%, according to the Tundra data.
It said that Iran can increase its output by up to 0.15 million bbl per day at short notice, while this could rise to 0.25 mbbl by 2016. But for deeper impacts on the oil market, the country will have to introduce considerable infrastructure investments in its oil industry.
Given that Pakistan imports two-thirds of its fuel use, a low oil price is good for the country, because it means the balance of trade deficit can be reduced.
“A lower oil price will, however, result in a rise in consumption. In the first half of 2015, import volumes of oil rose about 60%.”
For Pakistan this has meant little change in net exports as counted in dollars. However, inflation, which is highly correlated to the price of oil, hit its lowest level in many years over the year to mid-2015.
“If the oil price rests around $50-55 per barrel, and assuming no unforeseen incidents occur, there are good prospects for the inflation target for the period July 2015 – June 2016 to hit 6%,” Tundra added.
“The construction of the 2,770km long pipeline for natural gas between Iran and Pakistan, which was initiated by the last Pakistani government, but which hit a wall in connection with the sanctions, will most likely be resurrected. The project could result in energy poor Pakistan being able to receive some 750 million cubic feet per day. This would lead to long term positive developments for the country’s industry and growth.”
The impact of the deal with Iran on Pakistan’s domestic oil and gas industry will, however, be limited, Tundra believes. This is because energy prices are heavily regulated, with the local price of oil set at $30 per barrel. Gas prices are already subsidised and a lower oil price will therefore not lead to lower gas prices.
The impact on the local cement industry is seen to be balanced: there has been an increase in competition from Iranian cement producers on their biggest export market Afghanistan, with Iranian cement reaching that country via Pakistan.
And despite views that Iran’s currency will strengthen, making its cement exports less competitive, Tundra believes that “when the sanctions are lifted, Iran will be able to export to more countries in the region.”
“Some of these are export markets for the Pakistani cement industry too, so it will face increased competition.”
Summing up the impact of the nuclear deal, Tundra says it is not the case that all sectors in Pakistan will benefit, but taken as a whole, the deal is good for Pakistan, given that its energy import bill will fall and inflation will be held low. Also, a more stable geopolitical environment will benefit the country over the longer term.
There has been a deluge of comments following the UK general election, its outcome, and what it means for the Brexit process going foward. InvestmentEurope and its sister titles have been gathering a number of these comments below, and will keep adding...