The Iranian president is expected to increase government spending in 2008 as he seeks to redistribute revenues from oil exports to his key supporters in the run up to the March 2008 parliamentary elections and the 2009 presidential elections.

Iran’s budget deficit is only 1 per cent of gross domestic product, but the country will become more indebted as Ahmadinejad spends heavily on infrastructure and petrol subsidies, according to Richard Fox, head of sovereign ratings for the Middle East and Africa at Fitch Ratings.

“Iran’s ratings are vulnerable to any major weakening of the oil price or material deterioration in relations with the international community. However, Fitch’s judgement is that such deterioration is unlikely for the foreseeable future,” says Fox.