Following a currency crash and ban on parallel market trading in April that ravaged stock-market listed banks reporting a combined $4.5 billion in losses, the sector braced for further damage with President Trump’s decision to resume primary sanctions and scrap nuclear deal participation. They will target the central bank to block dollar access and cross-border correspondent relationships which had proliferated with Asian and European banks the past two years after the system rejoined the SWIFT payments network. In his second term Iranian President Rouhani had bad loan cleanup, officially at $25 billion or 10% of the total, as a priority following a 2017 International Monetary Fund report calling for a” comprehensive asset quality review and recapitalization plan.” He and a team of technocrats tried to pass legislation in parliament to strengthen independent supervision and modernize management and disclosure practice, but it was routinely sidetracked by conservative opponents eager to maintain insider state control and credit provision.
GDP growth is put at 4% for the fiscal year ended in March, despite oil shipments of 2.5 million barrels/day and non-oil exports each generating around $50 billion, following months of protests over poverty and unemployment and labor strikes over unpaid salaries. Although international reserves are over $100 billion, capital flight in the first quarter of this year, mainly through informal hawala channels, may have been $30 billion as the rial lost one-third its value against the dollar before the government imposed a single 42,000/dollar rate and barred individuals from holding more than 10000 euros. It introduced a new foreign exchange trading platform but has yet to define rules for business use, as companies continue to tap underground networks for funding needs as well as for money laundering and speculation. According to the central bank the net capital outflow in the first half of the last fiscal year was $6.5 billion as foreign direct and portfolio investment barely materialized despite the former’s $100 billion medium term goal. The shunned Revolutionary Guard, whose stock exchange listed construction arm just announced 40 mega-projects to support the “resistance economy,” is still dominant across a range of industries as the World Bank Doing Business ranking is stuck at 125th place.
Fiscal and monetary policies have squeezed middle class households that placed their faith in Rouhani’s reform agenda and improved living standards with the six-nation 2015 sanctions lifting. The latest budget blueprint showed the military and tax-exempt bonyad religious foundations with the largest chunks, as food and fuel subsidies are curtailed and public investment for infrastructure is only 3% of GDP. High interest rates cap fixed investment at 20% of GDP, and the central bank recently floated bonds at 20% yields to try to soak up liquidity from the foreign exchange market. It now claims fluctuations will be limited to 5% annually without detailing intervention strategy or earmarking reserves, further eroding strained credibility prompting calls for governor Valy Allah Seif to resign.
Under compromise proposals for lawmaker consideration this body would not be autonomous but overseen by a “high council” of senior cabinet ministers and politicians. Moves toward Basel III and international financial reporting standards are on hold, as supervisors step back to deal with previously unlicensed credit providers run as pyramid schemes. They seized and merged several into new entities like Ansar Bank that will fall fully under prudential rules. Big banks like Sepah had to dramatically raise capital to meet a stiffer 10% of assets threshold in effect since 2017, as all of them on the Tehran stock exchange were ordered to retain profits. In a vicious debt triangle, commercial lenders owe the central bank hundreds of billions of dollars from decades of emergency lines, while the government owes them $15 billion for past budget borrowing. To clear the arrears and restructure ailing units new bonds are likely to be issued which would be placed with captive pension funds and other equally unhealthy and poorly managed institutional investors. The final workout tab could be $200 billion, and the current 35-strong sector could consolidate into a dozen groups, according to experts, with President Trump’s repeated sanctions now sharpening the blow.