Iran’s Offsetting Oil Anguish Salve
The Tehran Stock Exchange local index hit the record 200,000 mark despite harsher US sanctions aiming to eliminate oil exports and branding in full the Revolutionary Guard (IRGC), which controls listed companies accounting for an estimated one-fifth of the economy, as a terrorist organization. Investors preferred equities over the battered currency and gold markets as they sought refuge from deepening stagflation, with gross domestic product down 4% on 30% inflation through the last fiscal year ending March, according to government figures. The International Monetary Fund predicts greater output contraction over the next year to 6% as consumer prices rise 40%. Oil earnings fund around half the budget, with last year’s deficit at an historic $15 billion. The central bank, which has just begun formal open market operations, is responsible for 20% money supply expansion to further embed inflation, as it tries to kick-start growth and ensure banking system liquidity.
Economic and financial sector health is at its worst since 2012, when previous global as opposed to unilateral sanctions pushed Tehran into relief talks with outside powers in exchange for nuclear weapons development monitoring. While Washington has withdrawn from the deal, Europe and Asia are still in, as they look for cross-border payment structures to allow continued trade without drawing US Treasury Department ire. France and Germany championed a special-purpose vehicle for barter exchange in essential goods, but it not yet in effect and may be confined to highly-restricted humanitarian purposes with the Trump Administration’s intended ban on all oil exports and Revolutionary Guard-connected transactions. Iraq is the only country to get permission for a waiver on petroleum shipments, and China and Turkey criticized the decision and may phase them out over time, but their banks and companies are clearly in enforcement cross-hairs. The Bank of Kunlun, a well-known Chinese intermediary, has already faded from the scene, and policy banks leading the bilateral Belt and Road initiative are also on the alert. However domestic retail investors have factored in these outside worst-case scenarios and see local currency value only in shares, with the rial in parallel trading free fall toward 150,000, compared with the 42,000 official rate, after the IRGC’s terrorist designation.
Iranian oil sales through March plunged around 60% from the 1.5 million barrels/day projected in the budget, before the Trump Administration’s zero target was finalized. Non-oil exports slipped 6% to $45 billion, reversing the previous year’s 12% increase. The squeeze’s fiscal hole is exacerbated by widespread tax evasion, estimated at 30-40% of the eligible base according to a parliamentary commission. It also jeopardizes the traditionally positive current account balance and international reserve position, which analysts believe is now below $75 billion, with only a fraction held at home immediately accessible and liquid. Iranian officials claim the stash is ample and that their heavy crude is not readily replaceable by major Gulf producers, and secret transaction channels are in place for backup. However recession was reported across the board in the last September-December 2018 quarter, including agriculture, mining and industry, which plunged 9%. Flooding the past month added economic damage with losses put at $2.5 billion, and catapulted meat and vegetable prices 100% into the Persian New Year, government statistics showed.
The World Bank’s Middle East/ North Africa outlook released for the Spring Meetings forecasts another year of near 4% contraction, a 5% of GDP fiscal deficit, and slight current account surplus. It will be the only country in the region in recession, with unemployment also expected to worsen to 15% on youth joblessness double that figure. Multilateral agency observers cite promised banking sector reforms, including central bank monetary policy conduct through benchmark Islamic finance instruments, bond and interbank market deepening, and stricter independent regulatory oversight as pathways out of crisis. They have long advocated exchange-rate unification, shelved indefinitely a year ago when emergency import measures and an informal dealing crackdown were imposed when the US left the nuclear agreement. Iran’s Budget and Planning Organization head admitted in April that the “ approach is not working” with fraud and embezzlement and offshore flight allegedly pervasive. The multi-tier system may be simplified in an open electronic platform, as central bank governor Abdolnasser Hemmati also points to “psychological factors” in currency panic due to linger without broader economic policy sanity.
