Iran’s Raucous Sanctions Romp

After a 20% gain in the fiscal year first quarter ending in June, the Tehran Stock Exchange local index added another 5% through August in the face of  US “maximum pressure” sanctions banning all global oil and banking engagement, as the government hailed decelerating currency and economic slide. The market seemed to shrug off Persian Gulf military alerts on seized oil tankers amid reports a secret trading unit was in place to continue exports to China, India, Syria and Turkey. Analysts estimate that up to 500,000 barrels/ day can be sold in comparison with the previous peak five times that amount, despite Washington’s claims of shutoff campaign victory. The Oil Minister Bijan Zanganeh preserves total deal confidentiality as “war information,” as daily inquiries reportedly arrive intended more to glean intelligence than to arrange shipments. July’s official sales tally was 100,000 barrels/day, an 80% decline from the same month in 2018, as Supreme Leader Ayatollah Ali Khamenei lashed out at the Trump Administration’s “economic terrorism.” He acknowledged that “easy income” from crude oil was no longer viable, and urged domestic goods and services diversification and higher productivity.

Vice President Eshaugh Jahangiri recently told business executives that the past year’s shock from sanctions and poor policy had worn off, as central bank head Abdolnasser Hemmati cited new rial stability at around 120,000 dollar on the parallel market, a 40% recovery over the past year. A secondary regulated foreign exchange hub for non-essential imports was launched in July to relieve pressure, and the Iranian cabinet approved legislation to redenominate the currency by eliminating four zeros and renaming it the toman. This process is well established in emerging markets to engineer a one-time devaluation and attempt to dampen future inflation expectations, with the current rate at 40%. Under the plan 10 rials will equal one toman, and the administrative and printing costs for the transition are put at $150 million. Despite these changes, the government continues to crack down on unauthorized “enemy” dealers, with the judiciary arresting dozens who could face execution. Leaders at Iran Revolutionary Guard Corps-controlled Bank Ansar were implicated in speculative schemes, amid other major financial sector corruption cases targeting the former chief of Sarmayeh Bank and labor minister, who received millions of dollars in loans without collateral.

The minister was a well-known Reformist party lawmaker and so-called “aghazadeh,” roughly translated as “child of a noble.” This bloc is a main pillar of support for President Hassan Rouhani, but its standing has waned ahead of parliamentary elections scheduled in six months. A candidate recently lost the deputy speaker race, and a conservative cleric ousted the chair of the national security and foreign policy committee from that group. In Tehran municipal contests in July, the Reformists in charge had a mixed showing on just 10% voter turnout. Opponents accused them of “poor performance “in a sign their legislative majority could fade next February as another movement, Iran Revival, embraces the political and economic overhaul mantle.

Gross domestic product is down 5% and forecast to be barely positive next year, with the International Monetary Fund projecting just 1% growth into 2024. Economists note a 2% decline in private consumption as a relative bright spot, as stock pickers target household plays such as Seamorgh, a poultry company, and Bank Pasargad, a privately-owned retail lender as compelling alongside the bargain five times average price-earnings ratio on the exchange. Futures and options trading began the past year, and a “prime” listing tier will soon be inaugurated with a minimum 25% free-float and formal corporate governance and transparency score, according to management. Securities depository information through July shows financials, chemicals and autos as the most actively traded sectors, often through ETFs investment houses with overseas experience pioneered. Large scale state enterprise divestiture could be on the table as well as a stock market driver in the near future, as Iran’s Planning and Budget Organization issues a blueprint for further constraining deficits after citizen subsidy rollbacks. While foreign borrowing fell 5% in the end-March quarter to $9.5 billion under US prohibition, domestic debt through Islamic Treasury bills as a fresh channel has spiked, while the government turns to barter to settle private sector arrears under self-inflicted maximum fiscal pressure. 

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