Iran’s Botched Banking Rescue Roar
The Tehran Stock Exchange’s one-year performance in dollar terms showed an 8% gain into December, one quarter the almost 35% MSCI emerging market surge, as mainly working class protests first erupted in the second city of Mashhad over pocketbook economic and credit hardship. Just before the massive “bread and jobs” rallies the International Monetary Fund in its annual Article IV consultation underscored the urgency of bank bad loan removal and recapitalization, amid preliminary steps to place unregulated lenders under central bank control and shut them down if violating prudential rules. They have been closed suddenly without public notice, and small savers lured by higher rates beyond the mandatory 15% ceiling have lost or been unable to access accounts without a formal deposit insurance system.
Many of these underground providers have ties to the Revolutionary Guard(IRGC), which dominates the economy with major stakes in stock exchange-listed companies, and their collapse coincided with first-ever budget disclosures that it is in line for multi-billion dollar allocations while consumer subsidies face cutbacks to achieve fiscal balance. The IMF mission pointed out that additional government debt to cover bank cleanup will reinforce pressure and recommended ending tax exemptions benefiting the giant bonyad religious foundations in particular. President Hassan Rouhani won reelection campaigning for financial system modernization and integration, but has been stymied by officials and legislators in the revolutionary “old school” Supreme Leader’s camp. Their resistance has delivered a body blow to income improvement aspirations under nuclear deal sanctions relief, which the US may now roll back under the Trump administration’s tougher “decertification” stance. It urged the demonstrators to continue regime confrontation and prepared to reinforce IRGC punishment for military action in Syria and the region, while foreign investors from Asia, Europe and the Middle East focus equally on the banking crisis stalemate.
The President reprised his second term mantra after the protests spread nationwide by declaring the need for “major economic surgery” and referring to illegal credit firms as a “tumor.” GDP growth has rebounded to the 4-4.5% range with oil exports back to capacity, but inflation again is at 10% on higher food and fuel prices while youth unemployment is estimated at double to triple the official 12% level with millions of skilled professionals emigrating for jobs overseas. In the speech he asserted that the government must be accountable for corruption, with state and partially-privatized banks that dominate the $700 billion industry a prime conduit for insider deals resulting in scandals, including popular outrage last year around chief executives receiving hundreds of thousands of dollars in salary. The Fund’s Article IV statement ticked off a series of overdue measures to restore confidence and conform to frontier market norms, including a comprehensive audit and related-party loan bar, and a “time-bound” plan to write off real estate and other dud assets calculated at 20-30% of the total under international accounting standards. It also called for finalizing anti-money laundering laws to meet a Financial Action Task Force end-January deadline, and for a freer exchange rate after it tumbled 10% against the dollar the past year despite central bank intervention.
Since the Joint Comprehensive Plan of Action was inked two years ago lifting cross-border restrictions, almost 300 foreign banks have forged correspondent relations with Iranian counterparts. Chinese trade and development specialists have the largest lines under the Belt and Road initiative, with $25 billion recently committed for energy and infrastructure projects. Russia’s Export-Import Bank signed agreements in early January, and elsewhere in Europe smaller commercial institutions such as in Austria have been most active to avoid remaining US secondary sanctions. However they continue to steer clear of direct and portfolio investment participation as no profits are projected at the main state banks in the latest budget blueprint, after direct borrowing from the central bank rose 15% as of October. Financials, including government-run pension funds and investment companies deep in the red, have long been stock exchange laggards, with price-earnings ratios often below the five times average. Recently a new private bank IPO was completed and ailing Bank Maskan lost its housing monopoly to spur competition, but the balance sheet remains overwhelmingly negative with leading listings Mellat and Tejarat suspended from trading for lacking financial statements as investor protests also grow louder.
