Markets were unmoved by promising first quarter data on Monday as concerns over the future persisted. Poor company fundamentals meant few investors were elated at a sudden acceleration of economic growth after last year’s disappointing figures.
Equities fell to a 12-day low, even as the Statistical Center of Iran announced a 4.4% expansion in economic output in the first quarter of the fiscal year that started in March.
Iranian industries have been struggling in the aftermath of the 2012-13 economic crisis—during the period the economy fell into recession while runaway inflation drove up asset prices, a condition called stagflation by economists.
The crisis was the result of a combination of disastrous fiscal policies and economic sanctions leveled against Iran’s nuclear energy program by the world powers. The legacy of that crisis continues to haunt businesses today. Recent surge in growth however was not seen as a sign of a recovery as skepticism in markets remained.
“There is not much trust in the statistics, and everyone is looking for some tangible change,” Ali Khosroshahi, Omid Investment Bank head of bond trading told the Financial Tribune. “As we saw earlier, markets did not really react to the declining interest rates, and that’s much more important. So, mere data is not enough. Corporate sales or global commodity prices have to rise for market to change.”
Growth had slowed down to 0.9% in the prior fiscal year (1394) leading to fears of dipping back into recession. However, SCI data shows a 4% growth in agriculture and a 2.9% growth in services in the first quarter after the lifting of international sanctions. The key sector to watch was industrial output which surged 8.8% during the quarter after dropping 2.8% in the prior year.
Oil and Gas Factor
The surge in growth is fueled by the doubling of Iran’s crude oil output since the removal of sanctions in January. Other industries are still struggling for more reasons than one.
“Most of the growth in industrial output comes from the increase in oil and gas export, which has shown its effects on petroleum shares,” said Elham Khalili, chief investment officer at the National Investment Company in an interview. “The stock market is down because prospects for industries are still not bright.”
Companies are taking longer to settle their debts and the government has yet to meet its huge commitments to contractors, she added. They are still struggling to generate cash and sales increases are barely filling existing holes in corporate finances.
“For the time being, political issues are in the spotlight, and some want to hold the Rouhani government accountable for the wrongdoings of the former administration. This, among other things, is pretty conspicuous in the salary scandals,” Khalili told Financial Tribune. “I am personally not hopeful that these problems will be resolved anytime soon.”
Other market watchers were more somber. “I don’t know if the stats are right, but this growth is merely utilizing idle capacities, not productivity gains. We are just returning to zero,” Reza Ghahremani, Maskan Investment Bank’s head of R&D told the Tribune.
“A company’s output fell to zero from 20 units during the crisis. Now it is producing 10, and we are happy about it. What we are actually looking for is an increase in output to 30.”
According to Ghahremani, most manufacturers are still punching below their weight. He cites cement producers which are mostly producing at half their factory capacity. “It’s the same with automakers and steel producers.”
