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Bond Market Development Faces Major Challenges
Economy, Business And Markets

Bond Market Development Faces Major Challenges

With wild fluctuations tarnishing the stock market and the incoming flow of pessimistic reports on firms’ profitability, many investors seek to pour their capital in safer, less risky markets. In economic theory, the bond market would normally fulfill that role but in Iran this market has failed to attract attention. Tejarat-e Farda, one of the Financial Tribune’s sister publications has interviewed Ali Sanginian, CEO of Amin Investment Bank, for his views on the reasons why the bond market in Iran is underdeveloped and what should be done to invigorate it.
Sanginian believes investors are wary of entering the bond market because of its relatively young age, as it was launched about five years ago. Many of its instruments were created over the past year and, as a result, investors are little acquainted with them.
Bond markets have historically been initiated by states to sell debt to the public in order to finance spending. However, dependence on oil revenues has hindered the drive to form a bond market.
Even despite falling oil revenues and a budget strained by large subsidies to industries and citizens, the government has issued little debt on international and domestic bond markets. The percentage of outstanding debt to GDP was last estimated at 10.6, having little changed over the years and still seen as one of the lowest debts to GDP ratios in the world.
Although this makes Iran’s economy particularly attractive to investors, it has not been to the benefit of domestic companies, which have not been able to find an outlet to competitively sell their bonds.  
The majority of government debt has been lent directly by banks and credit institutions. According to one deputy at the Central Bank of Iran, outstanding government liabilities to banks reached 1 quadrillion rials (about $30 billion) last year.
Investment banks are the main players in the bond market, issuing and underwriting up to 36 percent or 74 trillion rials ($2.25 billion) of the total of bonds and securities available, according to a deputy at Farabourse – the Tehran-based over-the-counter market that controls up to 17 percent of the Iranian bond market. Nevertheless, Sanginian believes that investment banks in Iran do not have enough funds, estimated by him at 2 trillion rials, to underwrite more debt.
Sanginian believes that one major obstacle to the development of the bond market is its copying of transaction and rate-setting mechanisms from the money market. The market does not publish credit ratings. Without credit ratings and risk rankings, bond yields across different firms and organizations are homogenized even if the risks of the contracts differ.
In this scenario, high-risk bonds, which should logically be high-yielding, are brought down to the level of other less risky bonds. Consequently, many corporations, particularly now that economic crisis should push the risk of their bond yields up, are unwilling to enter the bond market.
Sanginian is also worried by the heavy involvement of CBI in fixing coupons and setting rates.
The recent lowering of official interest rates by about 2 percentage points, which has followed lower patterns of inflation, has also failed to spur activity in the bond market. Credit institutions and banks have artificially kept interest rates high, Sanginian believes, while pointing out that the credit crunch facing the country is another reason why banks have not issued debt.
The introduction of credit ratings and less CBI intervention have the potential of invigorating the bond market. Due to higher safety and lower yields normally attached to bond markets, Iran-based investors should be willing to shift their portfolios in favor of bonds while uncertainty and losses in the Tehran Stock Exchange continue and companies are cash-strapped.    
The CEO of Farabourse recently stated that this Iranian year (started March 21) will see the introduction of more debt tools and hopefully an expansion of activity.
While TSE has a market value of about $100 billion, the debt market is worth at most $6.5 billion. Sanginian even estimates that Iran’s stock market is about 60 times larger than its bond market.

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