Economy, Business And Markets

Capital Market Future Tied to Economic Reform

Capital Market Future Tied to Economic ReformCapital Market Future Tied to Economic Reform

Capital markets will not grow of their own accord unless economic reforms are introduced and required infrastructure is in place, head of the Money and Capital Market Committee of Tehran Chamber of Commerce, Industries and Mines said Friday.

“The Rouhani administration should implement all that is necessary if it seeks to develop a market-based economy and empower capital markets to emerge as financing hubs”, Ali Sanginian told Eghtesad News.

Capital markets are a combination of financial instruments, markets and regulations, he noted, and called for an environment compatible with the development and operation of all three factors.

Sanginian regretted that after western sanctions against the country intensified, none of the government policies had been effective in developing the market. He censured the government and its intervention in setting the price of every strategic or non-strategic commodity. “When the government interferes in pricing market mechanisms are obviously pushed aside. Under these conditions we cannot expect capital markets to develop independently simply because all markets are intertwined and flourish in conjunction.”

Sectoral policies in various ministries or the central bank’s decisions that are made regardless of other financial markets affect the capital market, he told the news outlet. “That is why we cannot expect the capital market to shoulder 40-50% of financing as is the case in developed economies.”

The “shallow depth of financial markets” in Iran, as Sanginian puts it, has indeed limited the power of investment banks to finance projects. However, he acknowledged that there is some progress on that front.

“They have helped to establish bond markets in the heart of the capital market and their performance is defendable in the past eight years given the prevailing macroeconomic conditions,” he maintained.

In a country where banks finance 85% of the economy, it would be “unrealistic’ to expect the capital market to print securities in large numbers, Sanginian warned, adding that “the cycle will take place gradually.”

 High Costs

On the reasons why financing through capital markets is more expensive than the banking system, Sanginian said, “financing follows market rates and when the market rate is low, financing is apparently cheaper.”

In the second half of the last Iranian year (ended March 20), the economy was under severe strain of liquidity shortages making it impossible to issue securities even at 28% interest rate” he was quoted as saying.

 At the time inter-bank interest rates were close to 30%. Thus, nobody was willing to lend at a lower rate.

On the reported lengthy process of financing by investment banks, he dismissed such criticism, saying financing through the capital market is a process that should take place incrementally in order to yield results.

Negotiations are underway with the Securities and Exchange Organization “to speed up the process.”

As capital markets are in direct contact with the public, it is necessary to ensure that the rights of investors are protected; information is equally shared and prices are fair, the official said. “That is why tighter regulations and stricter supervision in capital markets is crucial compared to the banking sector.”