The two securities exchanges, Tehran Stock Exchange and Iran Fara Bourse, are losing the fight to attract and hold on to investments with their main indices at two-year lows and falling further.
TSE’s main index, TEDPIX, has been lately hovering around the 61,000 points level.
Trade volume also remains depressed. During the past year, daily trade volume rarely exceeded one billion shares.
Investors are anticipating worst-than-expected second quarter company reports. The markets’ short-term prospects are bleak. But where does all that stem from?
High Money Cost
The main issue is cash shortage among lenders who have had their assets locked up in property markets, leading them to offer interest rates of over 20% per year to attract deposits, while charging even higher rates on the few businesses who have been lucky enough to get loans or are financially strong enough to pay the high rates.
Banks also officially have over $30 billion in nonperforming loans—over 60 days past their maturity. The Economy Ministry reckons the sum to be double that amount, however, as most lenders reschedule the due dates on the loans to avoid writing them off as losses.
Add to this another $30 billion owed to lenders by the government and you see how dire the state of the banking system is. This has sent banking shares, which make up a large part of the market, down to record lows. Bank Pasargad, one of the largest private lenders, has lost 33% of its market value during the past 12 weeks. Other lenders have not fared any better.
Furthermore, the crisis in the banking system is spilling over on the real economy, with businesses short of cash having to downsize their operations. Furthermore, high interest rates have absorbed investment deposits to bank accounts, depriving capital markets of the much-needed cash.
Government’s Need for Cash
The government has been promising market support, but its hands are tied and in some cases, analysts believe, it is exacerbating the bearish market.
Apart from sanctions curbing Iran’s sales volume of petroleum–one of the government’s main sources of revenue–declining crude oil prices have effectively put the squeeze on government finances. Benchmark Brent Crude nearly halved in price during October and December last year, due to a global supply glut and low demand from China and Europe, and prices have remained near $50 a barrel ever since.
The government has inherited large fiscal commitments from former president Mahmoud Ahmadinejad’s profligate projects when petrodollars were flowing due to record crude prices. However, empty coffers mean it can ill afford to meet these commitments, including $15 monthly cash payment to the public and housing projects for the poor, let alone invest in construction projects.
The result has been lower demand for cement and other construction materials and services, which weigh on corresponding industries.
Taxes
The empty coffers have also prompted the government to look to increase its tax revenues. According to President Hassan Rouhani, half of the Iranian economy is not paying taxes and expanding tax base is high on the government’s agenda.
However, in its search for revenue, the government is hurting businesses that already paid their dues. Many industrialists are complaining about open-ended tax rules, tax collection methods and long and expensive court cases to right wrongs.
New taxes are also further depressing some sectors.
Commodities and Pricing
Petrochemical producers, refiners and petroleum-related investment companies such as Ghadir Investment Company—which has invested 70% of its portfolio in petroleum stocks—make up between 40% and 45% of the equity market. The government raised their feedstock price last year but has not reduced prices despite falling crude prices, squeezing profit margins to record lows in the industry. The same thing has happened with miners.
The Way Out
Is there an end to all this? Analysts believe the current bear market will continue until mid 2016, as none of the mentioned factors shows signs of improvement.
The wheel of misfortune can, however, be turned by the release of Iran’s frozen assets, as part of the nuclear deal signed between Iran and the six world powers in July.
The release of assets will help the government pay off its debts and increase fiscal spending to stimulate the economy. It will also give it a stronger hand in sorting out the banking market. Perhaps then, it can cut the interest rates.
The deal’s implementation could also create an uptick in foreign investment, which would stimulate the country’s industrial output. For now, stocks can be had at cheap prices.
