US President Donald Trump speaks during a cabinet meeting on July 18, 2018, at the White House in Washington, DC. In a file photo taken on May 2, 2018, a handout picture provided by the Iranian presidency shows President Hassan Rouhani giving a speech on Iranian TV in Tehran. Photo: AFP and Iranian Presidency / Nicholas Kamm and Handout
The possibility of a meeting between US President Donald Trump, left, and his Iranian counterpart Hassan Rouhani worries the Netanyahu government, as it could affect the election next month. File photos: AFP and Iranian Presidency / Nicholas Kamm and Handout / 2018

The Tehran Stock Exchange Index was up 10% in local-currency terms in July for a 25% year-to-date gain, as retail investors desperate for outlets parked savings there as the rial lost half its value against the dollar with the first stage of US sanctions reactivation.

Valuations with low-single-digit price-to-earnings ratios and double-digit dividend yields were attractive on the US$150 billion market to offer the prospect of real returns, after inflation breached 15% in the immediate aftermath of an exchange-rate collapse as the unofficial rate blew past 100,000 to the dollar.

Oil and steel companies were popular as tighter global supply under Washington’s trade curbs served as share supports. Payment-service and pension-fund listings also got inflows with renewed external financial-system cutoff as a result of the Donald Trump administration’s denunciation of the Iran nuclear pact.

France and Germany announced a possible alternative to the cross-border SWIFT payments network, which could maintain Iranian bank correspondent relationships in euros, and Italy allowed smaller ailing banks to maintain ties as it works to resolve a debt crisis. However, the US Treasury Department in meetings with foreign counterparts opposed creation of parallel structures, which will likely take years to launch, and suggested that participants would be at risk of dollar-access bans.

China could offer its own workaround in the form of the Clearing House International Payment System (CHIPS) international channel started in 2015 to promote global acceptance of the yuan, but Beijing is now ensnared in separate bilateral trade and investment tiffs to forestall action.

From a simple money-laundering standpoint, mainstream foreign banks are in essence sidelined from engagement, since Iran’s parliament has not yet passed legislation to comply with basic Financial Action Task Force rules, with the October deadline for returning to the body’s blacklist imminent. Conservatives aligned with the religious-directed Guardian Council object that standards would compromise funding for allies such as Hezbollah.

President Hassan Rouhani and his “moderate” team have failed to win backing for broad banking cleanup and modernization into his second term, and the central bank head and labor and finance ministers were all ousted in August votes of no-confidence as real and monetary economy indicators spiraled out of control.

Rouhani blamed a US “plot” for street protests and a possible renewed recession with oil-export and foreign-investment curbs, after direct inflows fell short of target in 2017 at $5 billion, according to the United Nations.

He announced that 10% would be drawn from the sovereign wealth fund to combat sanctions, and that an anti-corruption bill establishing a dedicated tribunal was a legislative priority to assuage public anger at reports of insider currency deals.

A former deputy central-bank governor was implicated in illegal transactions, and a trial was televised of importers who benefited from favorable rates. Independent banking analysts called on the administration to continue in this vein and release a list of individual and state business borrowers responsible for the bulk of bad debts put at 15% of the total, but officials have so far demurred. The new central-bank head, previously a top commercial-bank and insurance executive, has no mandate for sweeping change.

The post-sanctions strategy stresses reliance on allies and trade partners in the region and Asia. A delegation of Iranian investors and manufacturers visited Syria in August to tout reconstruction prospects as President Bashar al-Assad moves with Tehran’s help, reportedly amounting to billions of dollars in military and security assets through the Revolutionary Guard’s overseas arm, to defeat the last pockets of rebel resistance.

Iran-China transactions were almost $20 billion in the first half, and export potential to neighboring countries is at the same figure, the Chamber of Commerce calculates. In the first quarter of the fiscal year through July, sales rose 25% to Iraq in particular, and devaluation could further aid competitiveness, in the Chamber’s view.

Iraqi Prime Minister Haider al-Abadi initially agreed to comply with the resumed US clampdown, but shifted course to seek continued geographic and historic ties. He formally requested exemptions from Washington as daily trade in energy and agricultural commodities hit a record $50 million in August, according to bilateral sources.

Iraqi depositors also insist that regulators maintain relationships to recover money lost to fraud and depreciation in Iranian banks, which have plagued them as relentlessly as decades of sanctions episodes.

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.

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