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The Tehran Stock Exchange was down 35% in dollar terms last year, twice the loss of MSCI’s emerging market index, even as the rial-greenback exchange rate stabilized at around 120,000 after a post-renewed US sanctions freefall. The currency still lost half its value against the dollar and euro the past year, as the central bank prepares a plan to lop three zeroes off the notes to symbolically restore confidence, following a familiar path for developing economies in double-digit depreciation and inflation.

President Hassan Rouhani acknowledged on the eve of the Islamic Revolution’s 40th anniversary that recession and public discontent, from a combination of banking and oil export restrictions and slumping domestic consumption, heralded the worst crisis in decades even as European countries introduced a barter trade instrument for vital food and medicine imports. He promised to continue social spending for the poor and middle class in the latest $40 billion budget despite deficit widening. 

Stock pickers amid bargain single-digit price-earnings ratios now target selective value plays like chemical companies earning hard currency. Partially privatized banks Mellat and Tejarat are also actively traded, as the government forces them to sell real estate portfolios and concentrate on better credit performance to reduce the estimated 15-20% bad loan ratio. However, the currency regime is still a mess, with officials dipping into a presumed $100 billion reserve stash for defense, and jailing and executing unauthorized dealers at the same time without a longer-term strategy. Government borrowing through high-yield Islamic Treasury bills sent public debt toward 50% of gross domestic product and injects financial system liquidity threatening to embed 20-30% inflation and decimate citizen purchasing power.

Government borrowing through high-yield Islamic Treasury bills sent public debt toward 50% of gross domestic product and injects financial system liquidity threatening to embed 20-30% inflation and decimate citizen purchasing power

The International Monetary Fund expects the economy to contract 3-4% for the fiscal year through March, with daily petroleum sales mainly to Asia at one million barrels, half the previous level before Washington exited the nuclear deal. Tourism reportedly increased with the cheaper rial, but industrial production in the auto and other sectors and real estate sales sank 20-30%, according to October figures. Europe’s special purpose financing vehicle Instex, created by France, Germany and the UK is at an early stage with only humanitarian shipments qualifying. It is unlikely to evolve into an alternative mainstream banking channel with the US “closely watching,” in the words of Secretary of State Mike Pompeo, who is organizing further allied crackdown efforts at a conference this week in Poland.

Instex’s founders have otherwise hesitated on strong commercial and diplomatic ties. The European Union in January imposed curbs on Iran’s Intelligence Ministry, which has been implicated in a Paris bomb plot, and Germany banned Mahan Air, a firm that carries military equipment to Syria, from landing in the country. Damascus and Tehran recently struck a banking cooperation deal on post-war reconstruction estimated to cost $350 billion, as the World Bank calculated $3 billion in Syrian private deposits available in 2016, down from $15 billion at the beginning of the decade. Financing infrastructure around the capital is a priority, along with energy, healthcare and transport according to the two sides.

Yemen is another foreign adventure, with Tehran backing Houthi forces in Sana’a against the Saudi Arabia- and United Arab Emirates-allied, internationally-recognized government in Aden. A United Nations-brokered ceasefire briefly allowed food aid and imports into the strategic Hudaydah port in a last-ditch effort to avert mass famine, as economic and monetary policies remain in chaos.

The World Bank predicts a 3% GDP contraction for 2018, following a 40% cumulative drop the previous three years. Inflation was in the 40-50% range after currency depreciation, staple goods shortages, and widespread money printing by the rival central banks in the two cities to cover public service and troop spending, despite civil service salary and pension payments in hefty arrears. State debt is at 75% of output, with the Sana’a Center think tank in December recommending a restructuring plan.

With oil exports suspended and worker remittances dwindling from the Middle East, the current account deficit stands at 9% to shake the currency, even as $2 billion in Saudi deposits and fuel grants the last quarter provided support. The dual monetary authorities are at odds over supervision, and conventional and Islamic banks may join Tehran counterparts in unmet rescue anticipation.

 

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