Fluctuations in the value of foreign exchange rates [against rial] have once again unsettled economic players, leading some economists to warn against the dollarization of Iran’s economy.
The exchange rates and their fluctuations are one of the key variables affecting the decisions made by traders in the capital market. The concurrency of these fluctuations with the budgeting process has made the issue even more sensitive. It would be impossible to analyze different scenarios ahead of the stock market without surveying the probable changes of the currency rate and the effects of budgetary decisions made by the government and the parliament on the fundamental variables in the economy and industry.
These were stated by Saeed Eslami-Bidgoli, an economist, in an article for the Persian daily Donya-e-Eqtesad. A translation of the text follows:
With countless risks threatening Iran’s economic and political arenas these days, it is difficult, if not impossible, to predict the future of markets. Of course, this note cannot include a discussion on the complex economic models involved.
The exchange rate [especially that of the US dollar] is one of the most important variables affecting the capital market [both in terms of prices and the psychological atmosphere of the market]. Exchange rate fluctuations not only impact the replacement value of many companies [especially capital-intensive manufacturing companies], but also directly affect their profits.
Major variables in Iran’s economy are also highly dependent on the exchange rate, which also have a bearing on the value of companies. At present, this variable impacts the level of risk perceived by investors and the subjective perception of the probability of the realization of the government’s plans. The fact is that comments made by policymakers and economic CEOs on foreign exchange policies, the adequacy of foreign exchange reserves and sentiments in the retail market have not led to a significant risk reduction in the market.
Disappointing Return on Investment in Capital Market
Upheavals in the exchange rate [and the prices of goods that are directly dependent on it] have also led to the dissatisfaction of investors in the capital market.
Since the beginning of the current Iranian year [March 21, 2022], investment in housing has yielded more than 50%, gold coin more than 100% and free market dollar more than 75%. But thanks to the government’s interference, mandated pricing and imposed risks, the capital market has had a return of less than 15% (based on the growth of the main index). This has prompted a large outflow of money from the capital market in the past few months.
Some experts attribute the market fluctuations in the years ending March 2020 and 2021 to the increase in the exchange rate and high inflation, as well as the failure of the prediction regarding the election of Donald Trump as US president. Of course, these are effective variables in economic models.
Now that the return on investment in alternative markets such as automobile outweighs that of capital market, some economic players believe that this lag will be compensated and as a result the capital market can generate decent profits in the coming months.
The gold coin market is even more chaotic; the dollar calculated in the price of a full gold coin, half gold coin and quarter gold coin is more than 550,000 rials, 650,000 rials and 850,000 rials, respectively.
Different Exchange Rates in Budget
The interesting point is that the exchange rate envisioned in the budget bill is not a fixed rate. The government has used the rate of 230,000 rials in its calculation of oil revenues [oil income is obtained by multiplying 1.4 million barrels of oil with an average price of $85 and a dollar exchange rate of 230,000 rials].
It is obvious that if the government fails to sell this much oil or the average price of oil decreases, the government should convert the exchange rate to generate the targeted revenues.
For example, if the country sells 700,000 barrels of oil on a daily basis and the average price per barrel stands at $70, the dollar exchange rate should be converted to 500,000 rials. On the other hand, it seems that the basis for calculating customs revenues in the budget is not 230,000 rials; the open market exchange rate has been used as the basis for these calculations.
The US dollar exchange rate of 285,000 rials is currently one of the main axis of the government’s policies. The different exchange rates of the dollar in the budget show that the government has not set a specific target for the exchange rate and the fluctuations may persist. This issue may be the basis of confusions in currency regulations, i.e., the root cause of many problems in the past.
The increase in the rate of gas feedstock and petrochemical fuel, and the gas rate for steel and cement industries are among important issues in the budget bill of the next fiscal year (starting March 21).
Lost Trust
The rise in feedstock and fuel prices can impose a burden of 350 trillion rials on the petrochemical industry, which increase in costs can severely affect some methanol companies.
However, the truth is not the impact of these policies on a couple of specific companies. The general concern of capital market players pertains to the lack of trust in the government’s possible attention to this market and its development. Many capital market players worry that the government will reach into the pockets of large listed companies in the event of a severe budget deficit and the policies the government is likely to adopt then will hurt shareholders.
Mandatory pricing is one of the major worries of traders in the capital market and stock exchange companies, as experience has shown the bargaining power of the groups benefiting from this policy is high.
To clarify this issue, you can follow the news on the supply of cars in the commodity exchange market, which issue gave rise to fluctuations and uncertainties in the capital market in the past few weeks.
The impact of the budget and its policies on macroeconomic variables requires a separate write-up. Many experts believe that the inflation rate will be around 50% next year and the increase in interest rate will have a great impact on the direction of investments next year.
While the government has increased the deposit interest rate to 23%, bonds are being traded at rates above 30%. It is impossible to pay attention to the capital market without exerting proper control on the basic macroeconomic variables; any change in the macroeconomic variables will spread to all markets.
Note that the growth and development of the capital market requires the attention of policymakers (and not money injection). The government needs to restore the lost trust in the financial markets and this requires a detailed policymaking and a meticulous implementation of those policies. This problem is on the minds of stock market traders today.
