Iran’s Currency Run Unraveling Pose
Iran’s currency, which had gradually moved over the past year in official and parallel markets from 30,000 toward 35,000 to the dollar, immediately tumbled past 40,000 and the Tehran stock exchange index also shed 2% ahead of President Trump’s new sanctions on the Revolutionary Guard (IRGC) and declaration to the US Congress to decertify nuclear accord compliance. Equities had been up 10 percent in the first half of the fiscal year from March to September, and the influential Planning and Budget Organization chief, Mohammad Baqr Nobakht, a close economic adviser to re-elected President Hassan Rouhani, had ruled out devaluation before the financial market rout, which may have been triggered by other factors beyond Washington’s harder line that could target IRCG-controlled listed companies it accuses of “confiscating wealth.”
The central recently cut the benchmark deposit rate to 15% as inflation hovers around 10%, and customers scrambled into foreign exchange, also buoyed by demand around the Kurdish independence referendum in northern Iraq. The move was also precipitated by continued delay in unification of the dual exchange rate system, despite repeated promises to the International Monetary Fund and correspondent Asian and European banks which now conduct business since the country rejoined the SWIFT payments network. Reinforced US secondary sanctions could scupper these ties, but frozen financial sector reform is an equal threat especially since it is a centerpiece of President Rouhani’s second term agenda.
The IMF in its latest World Economic Outlook forecast GDP growth around 3.5% this year and next, as oil production ramped up to almost 4 million barrels/day within OPEC agreed limits for a 4.5% jump in the first quarter. Agriculture came in under that number, and industry including mining and construction showed the same performance, while services like hospitality and retailing surged 8%. Tourism boomed the past fiscal year with a 50% visitor rise to 6 million, and officials plan to triple the influx by 2025. Reported unemployment is 12.5%, and the youth figure is double that amount according to national statistics. The current account balance is solid with non-oil foreign trade increasing 5%, and exports to Russia a whopping 35%, in the first half. Foreign debt is low at $9 billion, with one-third short-term, and Vice President Eshaq Jahangari put FDI inflows at $15 billion since the nuclear deal went into effect in 2016.
Central bank governor Valiollah Seif projects trillions of dollars more in investment over the coming decade, as $20 billion in credit lines were recently signed with big Chinese and Korean and mid-size Austrian and Danish banks. A study last year by global consultancy McKinsey estimated $1 trillion in additional output in the next twenty years, tapping into the 80 million young, educated and tech-savvy population often cited by the few foreign portfolio managers who have started dedicated funds. Iran advanced seven spots in the World Economic Forum’s 2017-18 Global Competitiveness Index, at 70 out of 140 countries, on incremental infrastructure and regulation improvements. Housing may finally be in recovery after a long recession with 9% sales growth in September in Tehran. The state-owned mortgage specialist Bank Maskan plans to finance an ambitious 1.5 million homes in the coming years, and slashed the discounted borrowing rate to 7.5%., while other commercial banks have shunned exposure under 12-year repayment terms.
The IMF in an October visit praised moves to crack down on previously unregulated “shadow” lenders which evaded rate caps, following the summer decision by the Paris-based Financial Action Task Force to allow further time for anti-money laundering rule adoption. A ratings agency established by the central bank and Economy Ministry is to publically reveal general balance sheet risk ratings for the sector, with $700 billion in assets, this month. Iran’s thirty-five banks currently have capital adequacy ratios between 6-10%, as they struggle with double-digit bad loan loads and prepare for eventual Basel III prudential standards. Leading executives from fully private competitors calculate that only half the current system will survive under a cleanup that may cost in the $100-billion range in the initial phase. Foreign investors bypass these listings even as their trading rose 25% in the year through August, according to the securities supervisor. The country’s leadership nightmare may not come only from President Trump’s “bad deal” interpretation, but currency and share slides reflecting monetary and financial system inaction.