Economy, Business And Markets

Capital Market Financing on Growth Path

Business & Markets Desk
Capital Market  Financing on Growth Path
Capital Market  Financing on Growth Path

The Iranian capital market is expected to play a more central role in financing in the current Iranian year (started March 20), notably for the government to settle its debts and fund the ministries’ projects and state-owned entities’ operations.

The Iranian financial markets took the brunt of the decade-long sanctions imposed by the West over the country’s nuclear program. However, the mid-January implementation of the nuclear deal–struck between Tehran and world powers back in July–is slowly reintegrating Iran back into the fold of the world economy.

President Hassan Rouhani has made supporting the private sector and capital markets a top priority of his economic reform agenda, as he seeks foreign investment for tens of billions of dollars worth of infrastructure projects.

General financing through the capital market stood at about $29.7 billion last year—three times more than the $9.9 billion a year before, which points to active steps taken by market players with the support of the government to push the economy on the right track with the capital market as the pivot.

The breakdown of the funding is given in the following table:

> Islamic Treasury Bonds

Iran's treasury sold its first batch of government bonds, called Islamic Treasury Bills, to domestic investors last year on September 30. The new bonds were given as debt repayment to contractors who had the option to resell them in the Iran Fara Bourse over-the-counter market or wait and redeem them at maturity.

Similar to the US treasury bills that provide the backbone of fiscal spending in the world's largest economy, the Sharia-compliant bonds were sold at a discount to their face value in IFB.

Bondholders earned a comfortable 11.4% return after they were redeemed by the government five months later, bringing the real annual return on the treasury bills to 24.4%. The effective interest rate on the bills has been higher than what banks offer on deposits. Capped by the Central Bank of Iran, banks currently offer interest rates of around 20% per year.

Iranian bond sales will double in value this year, as the country encourages more companies to issue debt to deepen its capital markets, according to a senior official at Tehran Stock Exchange.

Thirty new offerings with a combined value of $10 billion are expected by March 2017, Rouhollah Hosseini Moqaddam, the vice president for issues and members at the exchange, was quoted as saying by Bloomberg. Eight sales took place during the last Iranian year, worth a total $5 billion.

“Our debt market is going to expand significantly this year,” the executive said from his Tehran office.

According to Hosseini Moqaddam, the bourse is also expecting 15 initial public offerings with paid-up capital of about $3 billion in the coming year.

> Gas Field Bonds

The jump in bond sales follows two issues by the National Iranian Oil Company for the South Pars Gas Field and the West Karoun Oilfield. The offerings, which had a combined value of $1.5 billion, received $5 billion worth of orders last month.

“If it wasn’t unprecedented, it was certainly rare,” said Mona Hajialiasghar, the chief operating officer of Tehran-based Kardan Investment Bank.

“The NIOC issues have taken the debt market into a new phase on the way to making the market mature, much bigger, more transparent and more competitive.”

Hosseini Moqaddam said around 60% of the new debt sales will come from the private sector and the rest will be from government, including another $1.5 billion bond for NIOC.

"The exchange has also asked Iran’s market regulator, the Securities and Exchange Organization, to approve plans to sell domestic Iranian bonds in foreign currencies to attract foreign investors into the market," he said.

Meanwhile, the issuance of the so-called Standard Parallel Salam securities has been on the rise in Iran Energy Exchange and Iran Mercantile Exchange, apart from the growing number of fixed-income funds debuting in the Iranian capital market.

> More to Come

In the new budget, the parliament has given the government the go-ahead to issue more bonds this year.

Nine ministries and their subsidiary companies, along with the Atomic Energy Organization of Iran, can now sell sukuk, Islamic bonds, to raise 100 trillion rials (about $2.86 billion) for their projects.

The government can also separately raise an additional 50 trillion rials through Musharaka sukuk to repay its debt to contractors. It can sell bonds with one to three-year maturity dates.

Currently, most bonds in the Iranian market have one-year maturity dates. The ministries of energy, defense, industries, roads, telecoms and youth are authorized to issue bonds. MPs also authorized municipalities and their subsidiary companies to sell 70 trillion rials of sukuk to fund their operations.

Based on preliminary forecasts in the sixth five-year development plan (2016-21), the share of capital market in financing is deemed to grow to 240,000 billion rials ($69.5 billion) by 2020, which implies an unparalleled growth in equity and debt markets.