Fitch says that gross domestic product (GDP) growth of about 5 per cent in 2001 and positive developments on the current account and budget sides have contributed to the rating, which has a stable long-term outlook. 'The current account has been in surplus for seven of the past eight years, leading to a continual accumulation of foreign exchange reserves, the establishment of an oil stabilisation fund in 2000 and a steady reduction in gross external debt - all with positive rating implications,' Fitch says.

Among other strengths of the local economy are Iran's position as a net external creditor and progress with economic reforms, notably the exchange-rate unification at the beginning of the running Iranian year on 21 March, Fitch says.

On the downside, Fitch points to structural weaknesses in the economy including extensive state control in local industries, restrictive lending by state banks, demographic pressures and high dependence on oil revenues. 'The oil sector generates 80 per cent of export receipts and 50 per cent of government revenues, exposing the economy to oil price volatility even with the oil stabilisation fund,' Fitch says. 'Diversification efforts have yielded few results and are not likely to succeed in the absence of foreign investment.'

Fitch also says that geopolitical developments across the region, strained relations with the US and the ongoing political struggle between different domestic factions have constrained the sovereign rating. Fitch says that it does not judge domestic political risks to be a threat to the regime at present.

The B+ rating places Iran in a direct peer group with Papua New Guinea and Venezuela. Fitch also assigned a B short-term rating.

The go-ahead to Fitch by Bank Markazi (central bank) to issue the rating is expected to pave the way for Iran's long-awaited debut Eurobond issue by June (see Banking & Finance).