Economy, Business And Markets

Avoiding Investment Pitfalls

Avoiding Investment PitfallsAvoiding Investment Pitfalls

In preparation for foreign investment, the administration of President Hassan Rouhani, including the Securities and Exchange Organization of Iran and other state bodies, has set up specialized task forces. Now, the Iranian private sector is also stepping up to the plate.

A specialized advisory committee has been formed within the Tehran Chamber of Commerce, Industries, Mines and Agriculture to facilitate the speedy entry of foreign firms and their access to local resources. The TCCIMA committee consists of various subcommittees, including ones tasked with assessing deregulation and capital markets.

This committee certainly has its work cut out for it, as foreign firms seeking to enter Iran face a multitude of challenges. There is a troubling lack of transparency and stability in regulations, and also issues with the adoption of laws at variance with international regulations, especially on partnership with local firms and investment.

At the macro level, stubborn inflation and continuing fluctuations in the value of the Iranian rial pose challenges, not to mention the endemic corruption.

The Corruption Perceptions Index, collated by Transparency International, ranks Iran 136th among 175 countries, underscoring the depth of obscurities in the country’s economy. Things have gone backward for Iran in this regard in recent years. In 2003, it ranked 78th—the best it has ranked since.

In an interview with Financial Tribune, head of the TCCIMA’s new committee, Iman Bahadorani, said his main mission is “to identify investment barriers and brief policymakers” ahead of early 2016, when the main sanctions are expected to be lifted.

Bahadorani added that “given our economy’s investment ambiguities, which are somewhat comparable with those of other emerging markets, TCCIMA is geared up to create a database of local industries aimed at presenting them to foreign investors.”

There are two types of problems embedded in Iran’s trade sector, namely procedural and economic. The first one includes giving permission to foreign investors to trade at the equity market, open bank accounts, register the company, adopt regulations and comply with conventional practices, with “Know Your Customer” on top of them, a member of TCCIMA committee told Financial Tribune on condition of anonymity.

The member noted that to sidestep pitfalls, the respective organizations, including SEO, the Central Bank of Iran and State Organization for Registration of Deeds and Properties, would be briefed.

“The economic problems consist of those directly associated with administration policies, like feedstock price and mining royalties. Hence, the committee has to approach the Cabinet on various occasions,” he said.

To help ensure sustainable development, it is necessary to have an efficient capital management. This is particularly the case, considering the Iranian industry’s needs and the government’s priorities.

As with other tribulations, this issue also overshadows all industrial sectors of Iran. Some of these problems are expected to fade away, once the sanctions imposed on Iran are lifted. One example is the upcoming reversal of the 2012 decision by the Society for Worldwide Interbank Financial Telecommunications to cut off Iran. However, policymakers must play their part to ensure there is genuine progress, as not all issues will be solved with sanctions relief.

Investment guarantees, rating agencies, smooth executive procedures and legal frameworks, as well as the upholding of international financial reporting standards, are essential to aid foreign investment. At present, there are great deficiencies in virtually all of these areas.

“Iran has lagged behind global financial markets and should improve infrastructure, standards and technologies,” Ali Sanginian, the head of TCCIMA’s capital market committee, told Financial Tribune. However, he noted that Tehran Stock Exchange is a member of the World Federation of Exchanges, underscoring the fact that Iran’s equity market adheres to required standards.

Nevertheless, there are plenty of other underlying impediments deterring foreign investment in Iranian stock exchanges. These include the daily 5% cap on index wins/losses, lack of genuine underwriters and market makers, and the complexity of price fixation for initial public offerings. There are also issues regarding expensive trading fees—which commonly exceed 1.5%—as well as the small portion of shares that are floated.

The lack of adherence to international financial reporting standards also points to a language barrier that must be overcome. Speaking to Financial Tribune on condition of anonymity, a Swiss banker with close knowledge of the Iranian market said Iranian companies and banks should have full reports in English—or at least for the listed entities. He also lamented that “many banks and companies do not have a website in English, and if they do, it is outdated”.

Indeed, monthly and annual reports in compliance with international financial reporting standards are essential to convince international fund managers to invest. However, many Iranian firms currently lack the bare necessities to provide them, such as investor relations departments.

Another challenge that should be addressed is the uncertainties gripping banks in Iran. The creditworthiness of Iranian banks is unappealing, with many of them grappling with overdrawn balance sheets.

“Iranian banks need to clean up their balance sheets from non-performing loans and be recapitalized,” the Swiss banker told Financial Tribune.

Indeed, Iranian banks have extended over $30 billion in non-performing loans, which are reflected in their balance sheets. Of note, senior presidential advisers estimate this figure to be double that amount, near $60 billion.

Meanwhile, the current liquidity crisis is exacerbating insolvency among Iranian companies.

“If a bank is basically bankrupt, nobody will extend credit. It means that letters of credit probably need to be collateralized or even fully funded. Hence, the cost of doing business is more likely to be pretty expensive,” the Swiss banker said.

Iranian banks also need to put in place procedures to comply with international accounting standards. It is no secret that many in the West consider Iran’s state-controlled economy prone to corruption.

“The largest companies in the capital market should be genuinely privatized,” Luxembourg-based financial analyst Pedram Assadi told Financial Tribune. “Currently, many large companies at TSE are still linked to the government.”

Liberalization of the economy is on the Rouhani administration’s agenda and the Iranian Privatization Organization is firmly in charge of this momentous task. More than $40 billion worth of governmental companies’ shares have gone public over the past 15 years. Of this, 28% have taken place within the last two years.

According to the Iranian Privatization Organization, 119 companies are in line to go public in the current Iranian year (started March 21). They operate in various industries, most of them in the electricity, services and oil and gas sectors.

Last but not least, due to the western sanctions, Iran does not have a fully functioning central bank. Combined with persistent inflation–though that malady is down by two-thirds over the past two years–this has made the Iranian rial prone to tactical devaluation. Hence, it is exceedingly challenging to embark on currency hedging.

Although other emerging markets face similar challenges, it would be a major misstep for the Iranian authorities not to address these barriers to foreign investment. While international firms are certain to enter, the nature of these obstacles can easily turn a flow into a trickle.

In this respect, the entry of the private sector in the fight against barriers to foreign investment should be commended. Yet it should not be overlooked that much, much more remains to be done.