The Tehran stock exchange continued its post-nuclear deal descent with the benchmark index losing 10% in the nine months through September, as daily trading volume and the average company price-earnings ratio at 5 reached new lows. The major listed sectors including autos, petrochemicals, mining and banking are all in recession “bordering on crisis,” according to the Economy Ministry, which received $100 million in  industry support from President Rouhani mainly for carmakers like Khodro, which previously thrived during a joint venture with France’s Renault. European and Asian business delegations have been regular visitors since the July accord was announced and won parliamentary backing both in Washington and Tehran despite conservative member opposition. Iranian oil and financial officials have also been active on the external conference circuit, most recently at the annual IMF-World Bank meetings in Peru, but direct and portfolio investments have not materialized without dismantling of immediate sanctions and decades-long economic distortions.

Iranian investors

Trade with leading partner China, at $50 billion in 2014, has also suffered with slowdown there, and state banks no longer seem in a hurry to enter as they grapple with worsening credit and capital market outlooks at home. The World Bank in a special report described potential doubling of GDP growth from the 2.5% reported the past year ending in March, and “windfall” living standard gains with future normalization, but stipulated that fiscal and monetary policies must also change.

The government controls an estimated 70% of the economy, and in the past decade almost $50 billion in state-owned company shares have been sold off, according to the Iran Privatization Organization. However these transactions have left intact majority ownership by official pension funds, industrial conglomerates, religious foundations and the Revolutionary Guard, with private sector stockholders unable to influence operations and management.  Of the $90 billion market capitalization, the “free float” may be only one-third and just a fraction of the 300 firms listed are actively traded. Foreign investor access was allowed just five years ago and according to the head of the Tehran bourse, hundreds of individuals and institutions have applied for licenses.

A handful of London-based frontier market specialists like Charlemagne Capital have tied up with local brokers to launch international funds as the International Atomic Energy Agency inspection process begins this month. They tout the large $500 billion output and 80 million population, and consumer segment in particular, despite retail sales decline in the months since the nuclear agreement. Exchange rate unification between the formal and parallel rates is also assumed as recommended by the IMF, although authorities have not offered a specific timetable, and promoters also believe the single-digit inflation target can be met after it was halved to 15% the latest fiscal year.

At the Bretton Woods institutions’ gathering in Lima, Iran’s Finance Minister pledged capital market deepening and banking system cleanup, and hinted at a return to sovereign external bond markets as in the early 2000s.  The credit rating then was high speculative grade and global agency Fitch maintained coverage until the 2008 crisis anticipating further issuance. Domestically the first Treasury bills were offered in September, as $300 million in sharia-compliant instruments went through the small over-the-counter market, the Fara Bourse. The borrowing is for past contractor obligations, and face value quickly fell to a steep discount on the above 20% yield. Dealers expect additional operations to alleviate the existing credit crunch, as banks try to grapple with their 15% non-performing loan ratio by local accounting standards. They reported a 20% earnings decline in the last fiscal year and now must offer 25% annual returns to attract deposits and sell off property holdings under stricter prudential rules. President Rouhani convened a conference on banking reform and rescue before the nuclear deal was struck, and in the absence of major steps a liquidity squeeze is imminent. The expected first release of frozen accounts in early 2016 will be around $30 billion and used mainly for $150 billion in infrastructure projects, according to Iranian representatives at the IMF meeting as the non-sanctions financial system stalemate continues to block a share rally.

Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.

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