Iran’s Defiant Subsidy Sacrifice

With the rest of the region under popular siege and with renewed clashes at home between security forces and the opposition “green movement,” the Tehran Stock Exchange was up 75 percent so far through the fiscal year ending in March on record capitalization above $100 billion as the first phase of the government’s staple subsidy removal plan was implemented. $20 billion in support will be withdrawn for utilities and food the initial year, and recycled partially to the poorest households and key industries and fresh infrastructure and transport investment. Inflation will double from the current official 10 percent rate, but targeted efficiency gains are designed to keep a lid on costs as the budget drain is also eased. Privatization is also an element in the strategy with sales to individual and corporate buyers through the exchange, with banks among sectors to go on the block as non-state market share grows in Islamic-style participatory loans amid portfolio deterioration for dominant players. To promote international interest, the Kish island free trade zone launched its own bourse recently with separate currency access and regulatory guarantees. On the anti-nuclear and terrorism sanctions issue, local sentiment was aided by efforts such as Korea’s to maintain commercial ties through dedicated cross-border facilities, and word that the main US Treasury official in charge of enforcement was leaving to be replaced by his deputy. Oil again over $100/barrel on the Libya cutoff and other demand and supply shocks will replenish official coffers along with the subsidy savings to improve the budget and balance of payments picture and mollify the business community which faced indefinite higher taxation.

The market reaction has contrasted sharply with neighboring linchpin OPEC producer Saudi Arabia, where financial assets have fallen across-the-board on Bahrain’s troubles and an ambivalent response to the King’s opposite $35 billion subsidy expansion in housing and additional areas. Shares have dipped in the $350 billion largest MENA exchange still closed to direct foreign allocation, as the 5-year CDS spread has near doubled from the pre-Egyptian crisis period. The forward dollar-riyal rate reflects local currency depreciation probability and inflation is in the 5 percent-plus range. Private sector credit increased just 5 percent last year as banks continue to absorb the fallout from ailing family-owned groups such as at the $10 billion Algosaibi conglomerate, where claims and counterclaims in numerous jurisdictions have impeded resolution. 4 percent GDP growth is to be repeated in 2011 on public works stimulus but youth unemployment is still in double-digits despite the enhanced education and unemployment package unveiled by the royal family to preserve calm during the desert blasts.