After an anaemic Q409 in Iran’s infrastructure sector, growth is set to accelerate in 2010 as a combination

of increased government spending, easing inflation and even subsidy reform leads to a boost in

construction for the near-term. However, the pick-up in real growth is not likely to be sustained for long

and BMI believes that growth should start to slow after 2011.

President Mahmoud Ahmadinejad delivered the new March 2010-March 2011 budget to the Majilis

(parliament) in January 2010, which allocates around US$110bn – or 30% of the US$368.4bn total – to

construction spending. The budget includes the issuance of up to EUR9.5bn in bonds over the year to

finance a number of infrastructure developments. On the back of this, BMI expects the construction

sector to grow by 5% in real terms in 2010, up from a sluggish 1.82% in 2009. But BMI forecasts a yearon-

year (y-o-y) drop-off in real growth after 2011, falling to 3.63% in 2014 bringing the total market

value to US$47.02bn.

Infrastructure spending in Iran over the forecast period may receive a boost from funds diverted away

from the government’s colossal consumer goods and services subsidy system. The controversial subsidies

reform was approved in January 2010 and will see the subsidy programme replaced by direct cash

payments, thereby saving the state approximately US$100bn per year. Around US$30bn was said to be

intended for industry and infrastructure, although the investment has become uncertain after insistence

from President Mahmoud Ahmadinejad that the savings serve as a carte blanche for the government.

That the reform may stoke chronic inflation in the country has become a popular criticism, however.

Having fallen to a multi-year low in Q409, we expect consumer price inflation to head higher through

2010, fed by rising commodity prices and a steady recovery in the domestic economy. But, as long as the

central bank continues to wind down its unorthodox lending facility to commercial banks, a return to the

rates of nearly 30% y-o-y witnessed in late 2008 is very unlikely.

While 2009 opened with the launch of the Isfahan-Shiraz rail line there was extremely little activity in

Iran’s transport sector in the final quarter. There was a striking exception in November 2009, when the

engineering division of the Islamic Revolutionary Guard Corps (IRGC), Khatam-ol-Anbia, won the

tender to build the strategically important US$2.5bn Chabahar-Sarakhs rail line. The decision to move

ahead with the line confirms the country’s higher priority for trade facilitation rather than passenger

transport, due to fears of a prolonged period of lower oil revenues combined with tougher sanctions, not

to mention the IRGC’s growing influence in the country.

The legal-regulatory environment remains obscure and underdeveloped, this coupled with the limited

access to foreign capital, means Islamic Republic being is placed last among the 10 countries in the

Middle East Region in BMI’s Project Finance Ranking matrix.