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A Lifeline Before Recovery
Economy, Business And Markets

A Lifeline Before Recovery

The government unveiled its much-heralded stimulus package in mid-October.
The package has a six-month expiration date and is aimed at increasing money supply to stimulate demand and pull the economy out of recession.
How exactly will it affect the morbid stock market, which bottomed out at a two-year low last month and is now hovering just above it? What are the pitfalls? And how promising is it in achieving the goal it pursues?
The package has been criticized for its short-term outlook, but that is a conscious decision by policymakers. It is an interim measure before the real game begins.
“The government is trying to inject the economy with short-term anti-recession stimulus, and hopes  real stimulants from the international community in the form of foreign investments will come into play and stabilize the economy, once the plan is exhausted,” Behrouz Khodarahmi of Iranian Investment Institutes Association told our sister publication, Tejarat Farda.
Truly, the economic shift and optimistic expectations over the Joint Comprehensive Plan of Action’s implementation are so great that any plan that does not account for the lifting of sanctions would be rendered useless once JCPOA’s effects materialize in the economy. In short, the government is trying to kickstart the economy before the fuel arrives.

  Stimulating Demand
The package is mainly focused on industries that produce durable goods—incidentally the biggest listed companies at Tehran Stock Exchange–and moves to stimulate demand in the least inflationary way possible.
As presidential advisor, Masoud Nili, said a few months back, the current recession mainly stems from stifled consumer demand.
These companies have seen their inventories rise as a result of people’s eroding purchasing power.
Iranian companies have 90 trillion rials worth of unsold goods piled up, according to Shahin Shyan Arani, a market analyst.
The costs are evident: no earning, cash flow hiccups and paying for the storage of rising inventories.
Critics like Mousa Ghaninejad, a prominent market proponent, note that it’s small- to medium-sized enterprises, which are less capital intensive and can ultimately get the heavy industries moving by decreasing unemployment and boosting wages.
Smaller companies are also better run, as they are mostly private and quicker to adapt to innovation.
Some pundits are mostly worried about how the plans are carried out. “Previous packages started out strong, but came to a halt when it got to the execution and issuing directives,” Khodarahmi said.
If this package goes the same way and fails to overcome government bureaucracy, not much headway will be made. A greater fault lies in what the plan leaves unsaid.
“Regrettably, the amount of incentives has not been specified for any part,” Khodarahmi said.
This ambiguity makes assessments of the plan’s impact a shot in the dark, which will also limit its psychological impact on investor expectations.

  Incentives
The car industry is getting a shot in the arm. Having one of the greatest pulls on the government, automakers have secured cheap financing for their car sales from the Central Bank of Iran.
As part of the package, car manufacturers will get unspecified sums from the CBI at 14% and lend it at 16% in 250-million-rial ($7,190 at market exchange rate) tranches to buyers of Iranian cars.
“The loans can give a short-term boost to the auto industry. But the effects will be small due to weak balance sheets and continuous losses made by companies in the sector,” Shyan Arani said.
The favoritism, however, may not be prudent, critics say. Shifting what little resources the government can muster to one industry leaves the others high and dry—a case similar to Dutch disease where growth in one sector leads to declines in output of other sectors.
The package does not leave smaller industries completely lost, however. Those with a paycheck can apply for 100-million-rial ($2,876) credit cards for buying Iranian appliances—how they wish to control the spending is anybody’s guess. This would stimulate consumer demand, but at the expense of poking inflation.
  Financing
But how this venture is going to be financed? Inflationary pressures will increase. Much depends on how well the government can guide the expansion of money supply and how it raises the finances for it.
“If the government prints money, in the best-case scenario, [the package] will create a temporary improvement in the stock markets,” Behzad Bahman-Nejad of Tejarat Farda wrote.
The main player here is the central bank. It is lending at low rates for the credit cards and the auto loans. Furthermore, it is cutting reserve requirements from 13% to 10%, based on each bank’s financial health.
Troubled lenders will be left to sort out their books. Cutting reserve requirement will increase liquidity in banks, boost lending if done right and lower borrowing costs for companies facing liquidity shortages.
“A one percentage point drop in reserve ratio releases 50 trillion rials ($1.43 billion) to banks,” says Shyan Arani. “It is forecast that the average reserve ratio in the banking system will decrease by 1.5%.”
With the lower reserve requirement releasing cash to banks, the government has promised to lower its cap on one-year deposits, in effect lowering the legal limit on all deposit rates. Currently, one-year deposits must earn no more than 20% annually.
If the central bank succeeds in keeping banks in line for the interest rate cut and manages to rein in illegal lenders—who offer higher deposit rates and operate outside of central bank monitoring—the stock market would become a little more attractive of an investment.
The whole plan could give a jolt to the economy. The increase in demand and cash lent to companies could restart their cash circulation and production cycles. Everything going well, the stock market would become more attractive and break its downtrend.
“The government owes banks and contractors 1.6 quadrillion rials ($46 billion) according to some statistics,” says Shyan Arani.
The overdue debt is one of the main reasons behind the recession. The more of it is repaid, more unfinished projects are finished and many new ones will commence.
Companies like energy giant Mapna Group holding–the largest government creditor with 300 trillion rials–will be the main benefactors and their shares could move Tehran Stock Exchange’s index.
“According to some administration officials, they will repay 75 trillion rials ($2.15 billion) to contractors,” said the senior analyst.
The government also plans to repay 160 trillion rials ($4.6 billion) by issuing government bonds and giving it to contractors who can resell the bonds in the newly created government debt market to get cash. But commentators doubt the market will be liquid enough for smooth operation.
The introduction of government bonds to repay outstanding debt, though small in scale, will boost the debt market and prepare the ground for later expansion.

  Effects
Many are worried about the package’s inflationary effects and its impact on equities.
“There is a negative correlation between inflation and real returns of stocks,” Bahman-Nejad wrote.
But inflation from the increasing liquidity will take over six months to materialize and its magnitude depends on how well the government will carry out the plan.
The continuation of low global commodity prices will help the government greatly in keeping inflation around 15%, as it has done so far.
The administration will probably change policy in six months and by then, sanction will be close to removal and help bring about the economic turnaround.
“If this road is taken in the specified timeline, it will create a positive pulse and if it is dragged out, it will have dire negative effects on the economy,” Khodarahmi said.

 

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