Economy, Business And Markets

Brokerage Firm Offers Market for New Treasury Bills

Brokerage Firm Offers Market  for New Treasury Bills Brokerage Firm Offers Market  for New Treasury Bills

Bank Keshavarzi Brokerage Company has stepped in as the first market maker for Islamic Treasury Bills, which debuted through Iran Fara Bourse early October to finance the repayment of the government’s debt to its contractors.

Chief Executive of Iran Fara Bourse, Amir Hamooni, announced the appointment of Keshavazi’s brokerage as market maker for the bonds last week.

“Keshavarzi Brokerage is committed to offer 500,000 bonds per day at a maximum market spread of 1% to mitigate their liquidity risk,” he said.

The brokerage runs the largest fixed-income mutual fund in Iran with almost $2 billion in assets under management.

“Market makers help ensure that trades can easily be entered and exited, thus ensuring liquidity and a fair and orderly market for the bonds,” said Hamooni. “However, since the Islamic Treasury Bills debuted last month, they have had trifling price fluctuations.”

Almost $300 million worth of the bills were issued in October, marking Iran’s initiative to forge a government debt market.

  High Yield

The bonds are estimated to yield 24.3% per annum considerably higher than the 20% cap set by the Central Bank of Iran on one-year deposits. This skewers the relationship between risk and reward, as government bonds tend to be less risky compared to bank deposits and expected to offer lower returns.

However, the higher interest on the bonds may be because of low demand, due to the small size of the market for bonds. As the market for the bills expands, their yield may come down.

Also, the central bank’s cap is a government decision and does not reflect the supply and demand for bank funding.

Nonetheless, the 24.3% yield and the appointment of a market maker is expected to convince more investors to shore up their portfolios with more treasury bonds.  

  Growing Market

It should be also noted that once Iran’s financial markets are plugged into the world markets, the bonds need to be rated by well-known credit agencies to convince foreign investors to buy into Iran’s government debt market.

Given that the creditworthiness of Iranian banks is in doubt and many companies, especially conglomerates, are struggling to find funding, the Islamic bond market will be the way to go for the government and many companies in need of money.

The administration is planning to raise $5 billion by selling Ejareh bonds—one of the 14 forms of Islamic bonds, Boursepress quoted deputy economy minister and the head of treasury, Rahmatollah Akrami, as saying.  

Growth in the debt market, whose liquidity is guaranteed by strong market makers, can help Iran’s capital markets stage a turnaround from their current bearishness.

  Under Duress

Traditionally, financing has been the forte of banking system. However, thanks to government debt to banks and contractors, coupled with the high volume of non-performing loans held on their balance sheets, the government has no choice but to expand the debt market to tackle the credit crunch that is squeezing industrial output.

But for now, project financing via bonds remains expensive for companies— with yields reaching almost 27%. The unwinding sanctions is hoped to bring in fresh inflows which, in turn, will bring yields down and help industries recover.

Iran struck a historic deal with P5+1—United States, Britain, France, Russia, China and Germany—in July, that is expected to lead to the removal of sanctions against Iran in exchange for curbs on Iran’s nuclear energy program.

  Enticing Prospects

The government is also planning to issue more dollar- and euro-denominated sukuk, eliminating foreign exchange risk for investors, to attract funding. These sukuks have mostly been used by the Oil Minstry for financing its upstream projects.

Here are other clues that entice foreign fund managers to ponder financing projects in Iran via bonds:

* Iran’s economic growth will outperform most of the Middle East and North Africa countries in 2016 as sanctions are removed, according to a Washington-based global bank association, Institute of International Finance, announced.

* Iran’s government debt was around 16.36% of its gross domestic product in 2015. Government debt to GDP in Iran averaged 15.31% from 1996 to 2015, reaching an all-time high of 22.67% in 1996 and a record low of 8.93% in 2011, trading economics data from the CBI show.

The government of President Hassan Rouhani is grappling with debts inherited from the previous administration.

According to CBI, the government owes almost $33 billion to the Iranian banking system. Repayment has been hard due to falling oil revenues and is the reason behind the push toward expanding the debt securities market.