The Tehran stock exchange turned positive in January for the first time in the latest Iranian fiscal year as “implementation day” was reached under the Vienna nuke accord for lifting initial commercial sanctions and accessing $100 billion in formerly frozen Iranian assets.
Automakers were a leading sector, after the government offered loan incentives and European joint venture partners returned. Lifting the embargo will ramp up Iranian oil production by another 500,000 barrels/day. But the global price collapse will not ease this year’s recession, according to the IMF’s December Article IV report. The lending agency highlighted the urgent “bank and corporate balance sheet repair” that needs to be done. Otherwise it warns that investors will continue to be deterred, even with the bargain average 5 times price-earnings ratio and nominal stock market capitalization as one of the region’s largest at $90 billion.
Three months ago President Rouhani introduced fiscal and monetary stimulus in an attempt to shake economic lethargy, pending eventual post-sanctions growth from increased trade and investment which the IMF estimates at 4-5% over the medium term. Businesses were short of working capital as a bank liquidity crisis pushed borrowing rates to 25%. This was exorbitant in real terms with inflation running at 10%.
Rouhani ordered the central bank to slash the reserve requirement from 3% to 10% to unlock funding. But the dominant state-run banks are already grappling with bad loans at one-quarter of portfolios, particularly in construction where private projects fell 20% the past year, according to official statistics. The companion $2.5 billion fiscal package aimed to support small and medium-size real estate development, and also offered discount financing for consumer durables including autos and housing. The program features 7-year credit up to $7000 for locally-produced vehicles, and a 50% jump in mortgage value through specialist Maskan Bank to $20,000 per individual, enough to cover one-quarter of standard Tehran apartment purchases.
By the end of 2015 interbank rates dipped to 20% with these steps, but listed banks continued to report profit drops as the government considered establishing a central agency for bad asset disposal. An updated money and banking law has been prepared to bolster supervision and resolution powers, and bring unlicensed intermediaries that have proliferated under deposit and lending rate caps within oversight. But adoption awaits the outcome of Iran’s February parliamentary elections, with 300 seats at stake for a 4-year term.
Expert Assembly members, chosen every 8 years to name the religious Supreme Leader, are in a simultaneous contest already attracting almost one thousand candidates. Economic policy has been debated on the campaign trail, with capital markets modernization an occasional theme after pilot sukuk Treasury bill issuance and a proposal to securitize payment arrears to government contractors. The September timetable for unification of the formal and parallel exchange rates, with the former strengthening toward 30000/dollar in early January, will be prominent in the next legislative session, which could also pass higher securities levies to bridge the 3% of GDP budget deficit following a VAT crackdown in recent months.
Monthly stock market turnover was less than $1 billion in 2015, but some Tehran brokers predict that sum in foreign investor inflows this year now that sanctions relief is in place. International fund managers can buy directly with regulatory approval, or access local offerings that include an index-linked ETF and 50-company pool avoiding lingering trade curbs such as on the Revolutionary Guard. Several dedicated hedge funds have started in London, and Asian banks and portfolio managers have been frequent visitors to the capital, which hosted the annual meeting of the Federation of Euro-Asian Stock Exchanges in November.
However, US interest is expected to languish with its tougher penalty regime, as the US Treasury Department has yet to spell out preliminary allocation guidelines and original sanctions are subject to “snapback” with violations at congressional insistence. Company accounting and reporting do not follow global standards and the country’s World Bank Doing Business ranking is near the bottom in 120th place. A former presidential economic adviser commented that mismanagement is as much a part of Iran’s modern history as sanctions, and both need to be convincingly banished for an equity market confidence blast beyond the immediate implementation trigger.
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Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.