Iran’s Meltdown Alarm Alacrity
The Tehran stock exchange zigzagged as the extended June 30 nuclear negotiation deadline with international partners neared, as companies forecast 10 percent profit decline despite reported 2.5 percent Q1 economic growth and currency firming to around 30,000/dollar average between the official and parallel markets. A $90 million petrochemical listing went ahead in April for the first IPO in a year, as banks and telecoms shares were also actively traded, with market capitalization over $100 billion on a 5 P/E ratio. Producer price inflation fell to single digits according to the government, as the central bank cut the benchmark rate 2 percent to 20 percent. External accounts showed a monthly non-oil trade surplus aided by rial depreciation although import tariffs were also raised to protect domestic miners. The main export destinations are Iraq, the UAE, China and Korea, as Dubai in particular prepares for normalization as a free-zone and financial services hub. An IMF Article IV mission also passed through with praise for consumer subsidy rollbacks to date slashing the program deficit to 1.5 percent of GDP. Under new rules cash handouts will no longer go to business owners and other higher-income groups. However the discount fixed-rate Bank Maskan mortgage scheme has recently been expanded in an effort to revive real estate activity which plunged 35 percent in the capital as measured by construction permits. The retail loan ceiling for housing-related needs was also increased from the current individual $12,000.
Monetary loosening extended to lower reserve requirements at 13 percent and an 8 percent reduction in the central bank’s window rate from 32 percent, as officials acknowledged losses among the big state lenders and industry NPLs in the 20-25 percent range after years of sanctions and dollar scarcity. Idle industrial capacity is estimated at 30 percent, and over half of commercial credit now goes for immediate cash flow purposes. Authorities trying to brake 30 percent annual money supply growth can ease only gradually and banks are locked in to previous 25-30 percent long-term customer deposits. A list of almost 600 major defaulters has been compiled but political and religious connections will stifle collection. President Rouhani’s team has also decried institutions’ diversification into property and investments and imposed a 40 percent of capital future limit on non-banking pursuits. Private banks like Pasargad and Parsian linked to larger business conglomerates have led the charge, and unregulated units directly established by the Revolutionary Guard may be used for stock market speculation and support experts believe.
The low-cost housing Mehr facility was inaugurated by former President Ahmedijad to spur domestic consumption and consolidate populist credentials to win a second term but came to represent 40 percent of base money expansion, according to the IMF. The household mortgage level was doubled in May to $25,000 at a 15 percent rate to be paid back in 12 years, and the central bank has agreed to move the program off its balance sheet to aid policy conduct and determine the size of potential liabilities to be added to bank cleanup costs. The total burden may already be close to the $100 billion in reserves blocked in foreign accounts under sanctions, as distress greets any end-June deal.
