Economy, Business And Markets

Tackle the Root Cause

Tackle the Root CauseTackle the Root Cause

I ran’s financial services are struggling to make a profit with brokers having seen their margins fall due to low trading volume. The government has recently stepped in but its involvement is making matters worse.

Recently, stockholders gathered in front of the Tehran Stock Exchange’s building protesting against insider trading and the regulator’s leniency on “corruption and [special treatment of] special traders,” Tabnak reported.

Stocks on the Tehran Stock Exchange have fallen 18.1 percent in the past year. They have lost a third of their value since their peak in January 2014. In their dismay heads of the Securities and Exchange Organization and the TSE along with other officials have called in the cavalry. In response, the Minister of Economic Affairs and Finance, Ali Tayebnia, last week urged (read commanded) commercial banks to take “necessary measures” to financially support the struggling capital markets. The minister was speaking at a meeting attended by the head of the Securities and Exchange Organization Mohammad Fetanat and the CEOs of several banks including Melli, Saderat, Tejarat, Sepah and Mellat.

The executives agreed to invest in the equity market 50 trillion rials ($1.5 billion at market exchange rate) in cash, Eghtesad News reported. Supporters said the sum is negligible compared to 2.8 quadrillion rials ($85 billion) value of the TSE and called for further investment.

But banks are already struggling to sort out their finances with nearly $33 billion of bad debt, almost equal that amount in doubtful debt, and an additional $34 billion of government debt. They are borrowing from the central bank at 34 percent interest and can’t attract big deposits which cost them about 28 percent interest, as bankers claim. They are also being forced to lower their lending rate to 24 percent in an attempt the central bank says would boost business growth. Under the current situation, asking struggling lenders to invest in risky stocks is an unnecessary burden.

Furthermore, government intervention in the market goes against its freedom. How can investors put their confidence in a market that is being manipulated by the government and jacked up by money from banks? How can traders factor in government intervention in their investment models?

If the government truly wants to address the equity market’s lackluster performance, it should address the root causes of the current bear market, specifically those that are its own doing. Businesses face bureaucratic laws which have led to corruption. State control and participation has stifled competition in many sectors. High systematic risks in the economy thwart long-term business planning. Poor financial supervision and banks’ poor financial health has made loans scarce, leaving manufacturers begging for cash, and driven up the cost of money, reducing the viability of many business plans.

As a direct response to the situation, the regulator should create confidence in the market by increasing market transparency, not by pleading to the government and the parliament for help that may give a short term boost to the market. The new company data provision system called Codal, which allows investors to receive company data simultaneously is a good first step. But the SEO should discard its leniency towards insider trading and price manipulation by large state and non-state investors, if it wants investors to put their faith in the equity markets.

As for the current downtrend, it has roots in macro economic factors and is completely natural. You cannot stop ice from melting if the room temperature is above melting point; all you can do is try to bring down the room’s temperature. Furthermore just like a child will not learn how to properly ride a bicycle if it has training wheels, Iran’s equity markets will not take their rightful place if continue to be salvaged by  big government.