Opponents of Iranian President Hassan Rouhani hold a protest outside the Iranian embassy in Rome on January 2, 2018. Photo: Reuters / Tony Gentile.
Opponents of Iranian President Hassan Rouhani hold a protest outside the Iranian embassy in Rome on January 2, 2018. Photo: Reuters / Tony Gentile.

The Tehran Stock Exchange’s one-year performance in US dollar terms showed an 8% gain into December, only one-quarter of the almost 35% MSCI emerging market surge, but record highs on the local index, as mainly working-class protests first erupted in the second city of Mashhad over pocketbook economic and credit hardship.

Just before the massive “bread and jobs” rallies, the International Monetary Fund in its annual Article IV consultation underscored the urgency of banks’ bad-loan removal and recapitalization, amid preliminary steps to place unregulated lenders under central-bank control and shut them down if they violate prudential rules. Some of these lenders were closed suddenly without public notice, and small savers lured by higher interest rates beyond the mandatory 15% ceiling have lost or been unable to access accounts without a formal deposit-insurance system.

Many of these underground lenders have ties to the Islamic Revolutionary Guard Corps (IRGC), which dominates the economy with major stakes in companies listed on the stock exchange, and their collapse coincided with first-ever disclosures in the government’s fiscal budget that the Revolutionary Guards are in line for multibillion-dollar allocations while consumer subsidies face cutbacks to achieve fiscal balance.

The IMF mission pointed out that additional government debt to cover the banking cleanup would reinforce pressure, and it recommended ending tax exemptions benefiting the giant bonyad religious foundations in particular.

President Hassan Rouhani won re-election campaigning for  modernization and integration of the financial system, but has been stymied by officials and legislators in the “old school” Supreme Leader’s camp. Their resistance has delivered a body blow to Rouhani’s aspirations for improvement of people’s incomes thanks to international sanctions relief under the nuclear deal, which the US may now roll back under the Donald Trump administration’s tougher “decertification” stance.

Rouhani won re-election campaigning for  modernization and integration of the financial system, but has been stymied by officials and legislators in the ‘old school’ Supreme Leader’s camp

The Trump administration has urged the demonstrators to continue confronting the regime and has prepared to reinforce measures against the IRGC for military actions in Syria and elsewhere the region, while foreign investors from Asia, Europe and the Middle East focus equally on the banking crisis stalemate.

Rouhani reprised his second-term mantra after the protests spread nationwide by declaring the need for “major economic surgery” and referring to illegal credit firms as a “tumor.”

Growth in gross domestic product has rebounded to the 4-4.5% range with oil exports back to capacity, but inflation again is at 10% on higher food and fuel prices, while youth unemployment is estimated at double to triple the official 12% level, and millions of skilled professionals have been emigrating for jobs overseas.

In Rouhani’s New Year address he asserted that the government must be accountable for corruption, with state and partially privatized banks that dominate the US$700 billion banking industry a prime conduit for insider deals resulting in scandals, including popular outrage last year around chief executives receiving salaries worth hundreds of thousands of dollars.

The IMF’s Article IV statement noted a series of overdue measures to restore confidence and conform to frontier-market norms, including a comprehensive audit and related-party loan bar, and a “time-bound” plan to write off real-estate and other dud assets calculated at 20-30% of the total under international accounting standards.

It also called for finalizing anti-money-laundering laws to meet a Financial Action Task Force deadline of the end of January, and for a freer exchange rate after the rial tumbled 10% against the dollar over the past year despite central-bank intervention.

Since the nuclear deal, formally known as the Joint Comprehensive Plan of Action, was inked two years ago lifting cross-border restrictions, almost 300 foreign banks have forged correspondent relations with Iranian counterparts. Chinese trade and development specialists have the largest lines under the Belt and Road Initiative, with $25 billion recently committed for energy and infrastructure projects.

Russia’s Export-Import Bank signed agreements in early January, and elsewhere in Europe smaller commercial institutions, such as in Austria, have been most active to avoid remaining US secondary sanctions. However, they continue to steer clear of direct and portfolio investment participation as no profits are projected at the main Iranian state banks in the latest budget blueprint, after direct borrowing from the central bank rose 15% as of October.

Financials, including government-run pension funds and investment companies deep in the red, have long been laggards on the Tehran stock exchange, with price-earnings ratios often below the five-times average.

Recently a new private bank initial public offering was completed and ailing Bank Maskan lost its housing monopoly to spur competition, but the balance sheet remains overwhelmingly negative, with leading listings Bank Mellat and Tejarat Bank suspended from trading for lacking financial statements as investor protests also grow louder.

Gary Kleiman

Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.