Iran’s capital market continues to grapple with fluctuations of foreign exchange rates.
The replacement value of companies as well as the income and profit of export-oriented companies change with forex fluctuations, as a large section of Iran’s capital market belongs to industries that are affected by commodity prices. Therefore, any change in the value of the local currency alters the nominal variables affecting the capital market.
This was stated by Saeed Eslami-Bidgoli, an economist, in a write-up for the Persian economic daily Donya-e-Eqtesad. A translation of the text follows:
Over the past years, the increasing exchange rates have always been one of the key drivers of the market. In fact, many experts believe that the main trigger for the capital market’s rise in 2019 and 2020 was the inflation rate and the surging exchange rate (depreciation of the national currency).
Experts also attribute the historic collapse of the market to the fact that with the defeat of Donald Trump in the last US presidential elections, predictions regarding exchange rate hike turned out to be wrong.
With these explanations, it is clear that capital market investors pay a lot of attention to exchange rate fluctuations. Also, many capital market players know that share prices can act as a cushion, absorbing the blows of the depreciations of local currency.
The rise in exchange rate, besides the government’s announcement regarding its support for the stock market and large firms and their subsidiaries for controlling the psychological effects and emotional behavior of investors, has helped the growth of share prices.
The effects of the forex rate rise, as you are currently seeing in Iran’s economy, are not only causing a nominal increase in the profitability and share prices of companies, but will have countless effects on all markets in the medium- and long-term.
Two basic questions: Is it possible to use the benefits of unplanned increases of exchange rate? And what tools do the monetary policymakers have at their disposal in this regard?
An overview of these two questions shows that policymakers do not have their earlier credibility, given the successive shocks suffered by the forex market in the past decade. When the price volatility is higher than its periodic average, officials resort to policing or circulate news about government injecting foreign currencies into the market.
These policies may calm the market in the short run, but they have minimal long-term impact. Also, the focus on long-term macroeconomic trends and policymaking by targeting macroeconomic variables has been missing in the economic policies of the past. This issue still fails to attract the attention of policymaking entities.
On the other hand, unplanned depreciations of local currency, contrary to what high-ranking officials of the country want, have troubled companies (even large, listed companies) with serious uncertainties, making long-term planning difficult.
Under the circumstances, issues such as the development of international markets or joint development agreements with technology owners will remain unattended and stock prices will continue to act as a cushion to prevent the losses of their assets.
As a result, using financial tools that depend on inflation to implement macroeconomic policies is one of the most basic ways of improving the path of policymaking.
