Iran’s Raisi Sidesteps Economic Revamp Race
Global attention is on the long-choreographed election of US-sanctioned hardline cleric Ebrahim Raisi as Iran’s president and the ongoing talks on reviving the 2015 nuclear agreement shredded by the US’ former president. Beyond the geopolitical headlines is spotting a route out the country’s economic collapse, precipitated in part by sanctions and compounded by waves of coronavirus outbreaks.
Firm data is elusive and an impediment to near-term frontier market consideration. Even the IMF and World Bank have published conflicting numbers. The World Bank revised 2020’s output from -3.7% published in January to +1.7% and the IMF puts growth at 1.5%. Domestically released data is equally contradictory. The Central Bank puts Iranian calendar year (FY begins in April) 2019/20 at -6.5% followed by +3.6% for FY 2020/21, while the Statistical Center of Iran shows the economy shrank 7% and then grew 0.7%. Most analysts agree based on anecdotal food and housing prices that inflation is higher than the 50% level officially reported for May, after the rial sank 45% against the dollar since the beginning of 2020.
After a massive bull run through the first nine months of 2020 touted by outgoing President Rouhani himself the Tehran Stock Exchange has corrected from individual savers’ frenzied rush to preserve value. The USD 250 billion exchange with near 700 listings has seen the average P/E ratio fall from a peak of 42x to about 14x. Commodity companies – chemicals, metals, refined petroleum, and mining – account for just over 50% of market capitalization. In response to the market’s fall, Iran’s Securities and Exchange Organization (SEO) has proposed two new programs to bolster the market during Raisi’s transition The vaguely named “capital market policy package to support production and eliminate obstacles” and “the plan to improve position and performance” intend to upgrade debt and equity offerings and prompted tens of thousands of points gains in the local benchmark index since the election.
Absent the ability to offload shares in loss-making state-owned companies to foreign investors due to sanctions even as access is authorized on registration, the government has launched two of three planned ETFs for retail investor collective exposure. The “Dara First” fund included shares in three banks and two insurance companies, while the “Dara Second” combined minority positions in four major oil refineries. A third ETF will include stakes in auto and metals companies. At the beginning of the quarter, the Tehran exchange had its largest ever IPO. The sprawling state Social Security Investment Company sold 10% of its shares, raising just over USD 400 million, and the Ministry of Transportation is planning a share sale to fund development projects.
In an effort to boost asset diversification, the SEO directed fixed income investment funds, with an estimated USD 12.5 billion under management according to local media, to invest at least 15% of assets in stocks. At the same time, the Central Bank lifted a ban on bank lending to brokerage firms, investment funds, and investment holding companies for stock market investment. While turning to outside investors for state bank recapitalization, the central bank continues to urge them to prioritize small business lending with flexible repayments. The government’s original Covid relief plan handed out USD 380 million to struggling firms and barred them from imposing penalties.
The fiscal deficit was 6.3% of GDP in FY20-21 from 3.7% previously, and the World Bank expects the gap to widen this year. The oil producer’s exports fell 12.2% while lack of hard currency access reduced imports an average 30% annually since sanctions were reimposed in 2018. Public debt topped 50% of GDP in the fiscal year that ended in March, up from 38.5% in FY 2018/19. To cover the hole, the government has relied on bond issues deepening the Islamic T-bill market as a priority and public asset sales, which the World Bank warned could “increase financial contagion risks in the stock market.”
A new nuclear-sanctions deal could reinvigorate the economy and stock market over time if also unleashing policy and practical steps to overcome Iran’s decades-long heavy-handed government control. Raisi – widely accused of massive human rights abuses dating back to the late 1980s – may not moderate Iran’s support for the Syrian regime or Hezbollah with a freshly inked 25-year “strategic partnership” agreement with China in hand as he consolidates initial diplomatic and political positions. During the campaign he shied away from economic and monetary issues that were former central bank chief Hemmati’s strength as a centrist candidate, and technocrat signals there from his team can resurrect a plausible pre-frontier market narrative.