After a week of depreciation, the rial rebounded against a basket of major currencies on Monday, with the dollar sliding over two percent to 33,800 rials and the Azadi bullion coin slipping 0.68 percent. The euro also lost one percent versus the rial.
Tehran's Ferdowsi Street, the center of foreign currency trade in Tehran, hasn't seen this level of volatility in over a year. Central bank officials were talking of a newfound stability in the market back in July. Few expected a sharp drop in oil prices, which, coupled with an extension of nuclear talks between Iran and the P5+1, triggered a plunge in the value of the rial.
The dollar soared 8.5 percent to hit an 18-month high of 35,230 rials by 11:26 GMT Monday, within a week. The euro has surged roughly seven percent in the past seven days. While the Azadi bullion coin went up from 9.14 million rials to a seven-month high of 9.62 million rials during the period – a 5.2 percent gain – despite gold slipping versus the greenback internationally.
But why?
Investors “put a halt to buying foreign currencies some time before the deadline for Iran-P5+1 talks,” said deputy minister Mojtaba Khosrotaj. So, when the talks concluded on Nov. 24, demand went up in the market. Many businessmen had hoped a final agreement would be reached with the West, opening the way for growth. But the talks were extended by seven months, keeping the shadow of uncertainty on the economy.
The rial further depreciated after OPEC decided on Thursday to keep current crude oil production output despite a huge global oversupply. The West Texas Intermediate fell 10 percent on Friday on the OPEC decision, settling at $66.15 a barrel. The drop fuelled speculation that the Iranian government – for whom oil sales constitute around 65 percent of total revenues – would struggle to cover an anticipated widening budget deficit.
As the situation worsens, government officials are trying to calm the markets. “Supply and demand will determine currency prices but we want stability in the market,” said central bank governor Valiollah Seif, a few months back. Now, officials are getting to work.
On Sunday, in the heat of the moment, Seif claimed, “Soon equilibrium will return to this market,” and on Monday morning, Mohammad Keshtiaray, head of Tehran’s Gold and Jewelry Union said the currency and gold market are “excited” and “prices will eventually settle on a new equilibrium though it’s uncertain how long this will take.”
As a continued reaction, Iran’s economy minister cautioned against “frenzied behavior” on Monday, adding that “people would incur losses” with such behavior.
Ali Tayebnia said, “There has been no fundamental change in the foreign exchange and the investment markets, and we aim to create a stable situation in the currency and investment markets.”
IRNA quoted him as adding that under the current situation, which has seen no fundamental changes yet, people should not exhibit “frenzied behavior”.
Also various government officials have claimed they will handle the currently widening deficit and that the over 40 percent drop in the price of crude oil since June will not have much effect on the economy.
The Tehran Stock Exchange slipped 0.1 percent at 72,120.7 by the end of Monday’s trading session, after falling 1.46 percent to 72,189.5 the previous day, according to its website. The Azadi and dollar also settled slightly lower on Monday.
Iranian Oil Minister Bijan Zanganeh said on Sunday OPEC’s decision was not beneficial to all OPEC members, but Iran had refrained from protesting in order to maintain group solidarity. According to IMF, Iran needs oil at $136 a barrel if it is to balance its budget and finance all its profligate projects – a legacy of former president Mahmoud Ahmadinejad.
The partial easing of sanctions, imposed over Tehran’s nuclear energy program, was continued and the nuclear negotiations were extended by seven month on Nov. 24. Efforts by Iran and six world powers – the United States, Britain, France, Germany, China and Russia – failed to transpire into a “comprehensive deal.”
The central bank recently reported that the budget had actually gone into deficit in spring (the first quarter of the fiscal year). The budget was $671.8 million in the negative and the deficit is expected to grow as government expenses were double its income. This was before the drop in oil prices.
A weakened rial and lower oil revenues will likely put a strain on an economy that is already struggling to come out of recession and fight off inflation. With over $100 billion of frozen overseas assets, it is unclear what the central bank can do to stabilize the currency market, unless they resort to closing it down altogether, like they did in 2012, though the economic outlook seems to be brighter than a year ago.
