The top promise of President Trump in the presidential election of the United States of America in 2016 was about tax reform plan. The plan lowers the corporate tax rate from 35 percent to 21 percent. Trump fulfilled his promise by proposing tax cuts in U.S. budget for 2018. A controversial question is that how it could affect other economies in the world and in this case, we want to review it effects on Iran’s economy.
According to the context of the U.S. budget, revenues would be reduced by 1 trillion Dollars over 2018-2027. Also, the budget cuts the federal spending about 3.9 trillion Dollars during this time. According to, Congressional Budget Office (CBO) estimation, the sum of the deficits would be reduced by 3.3 trillion Dollars under the plan. This reduction in U.S. deficit could cause to stronger DXY, which is a threat for commodities’ prices.
Based on the congress analysis of Trump’s budget and some of their differences for example in the growth rate of GDP, we could be sure to a certain extent that this GDP’s growth rate would increase from 2018 to 2027 roughly 1.8% annually. It would suggest us some possible scenarios which can have an effect on Iran’s economy.
As we explained in the articles of “Analyzing basic metal industry and its derivatives in Iran” and “Iran’s petrochemical companies; a review of the first six-month performance” , during the recent years, the trend of TEDPIX (Tehran’s Exchange Dividend and Price Index) follows the metal, iron ore and chemical indices in Iran as they allocate the most weight of market to themselves, which are export oriented.
As a result, there are two important factors, the commodities’ prices and the rate of USD/IRR. We can declare that USD/IRR would increase due to the inflation and the GDP of Iran and United States of America. About U.S., GDP would increase as we explained earlier, and also, due to some of indices in U.S., such as increment of average hourly earnings of all employees and decrease in unemployment rate in the U.S. (both of them not as fast as before especially last year), it could show that real GDP of U.S. is getting closer to potential GDP and by this way, economic growth is not because of more production and this convergence means more inflation. And also, about Iran, we could expect a little growth of inflation-adjusted GDP around 4% in the following solar year mostly due to better perspective of oil price and inflation is anticipated to increase as it moved from under 10 percent to higher targets due to depreciation of Rial in recent months. By this way, it would be so important for us to predict the commodities’ prices in the world.
We analyze this matter on the following scenarios:
First: increment of GDP of U.S. would lead to increment in DXY and also, the reduction in deficit in trump’s budget would bolster this opinion that DXY will be increased, then, as a matter of fact, we could predict that the commodities’ prices may decrease a little but not as much as financial crisis in 2008, because commodities’ prices would be determined by supply and demand internationally and specially by major consumers. And due to economic growth and probable growth in FAI (Fixed Asset Investment) in China, we could expect the demand increment in commodities especially copper and zinc. Then we can estimate the commodities’ prices will increase in the following year. But If the commodities’ prices decrease, we can expect the market follow the upcoming trend due to increasing rate of USD/IRR as we explained before. In fact, we can hedge the risk of decrement of commodities’ prices by increase in value of USD against IRR.
Second: It would be probable that Trump applies expansion fiscal policy by tax reforms and investment in infrastructure plans. As tax cuts plan will result in reducing U.S. deficits, public saving and thus national saving will be increased. Greater national saving would bolster domestic investment and cause to stimulate demands. More demand means more consumption of commodities. On the other hand, lower tax rate increases corporates’ profit and they can invest this money in their development plans rather than borrowing. Abundance of money cause to lower interest rate and weaker DXY, which brings higher prices for commodities. By this way, Stock Market of Iran would gain not only by increasing the USD/IRR rate, but also by commodities’ prices increment.
As we explained in the article, we analyze effects of Trump’s budget on Iran due to changes in commodities’ prices and also DXY, but excluding any changes in people’s incentives to save money and their works and also changes in productivity and some of unexpected events. In conclusion, export-oriented industries mainly metals, iron ore and petrochemical companies in Iran benefit from Trump tax cut plan. As aforementioned reasons, whether DXY strengthen or weaken, these companies can sustain or enhance their revenues. Additionally, authorities offer various incentives such as tax exemption on export.