Domestic demand for fixed income securities is rising. An agreement between banks to lower their borrowing rates has boosted demand for bonds even more, due to their higher rates compared to bank deposits.
On the flip side, bond offerings are scarce. Companies can rarely justify borrowing at such high rates. Those that do, however, have buyers lining up.
Demand outstripped supply by 10 to 1 in the most recent bond offering on Iran Fara Bourse’s novel securities market.
The over-the-counter outfit IFB has grown to be the most liquid exchange in Iran. Its stock trading volume overshadows Tehran Stock Exchange most of the time, while being less than a fifth of its size.
About 189 trillion rials ($5.4 billion) of Islamic bonds are currently on offer in securities markets. Three years ago, the figure stood at 39 trillion rials ($1.1 billion), according to Mohammad Fetanat, the head of Securities and Exchange Organization.
The government and its companies have been the prime borrower from money markets. The government accelerated its efforts last year with the introduction of new Islamic bonds, including the Islamic Treasury Bill. The bills resemble US treasuries and are sold at a discount from their face value and have no coupons.
The government’s motivation for selling 50 trillion rials ($1.4 billion) of these bonds last year was to clear part of its overdue debt to banks and contractors. Government overdue debt is one of the main reasons behind the lingering recession in the real economy, especially the manufacturing sector. The state has well over 1,000 trillion rials ($28.6 billion) of debt to settle with banks, which is an estimate but the actual sum is unknown, even to the government.
This large debt to banks has crippled banks. They have no liquidity to lend to businesses and since the banks carry out 90% of financing in Iran, this means high lending rates that few businesses can afford.
With a shortage of taxes and oil money, the government was planning to sell 400 trillion rials ($11.4 billion) of Islamic Treasury Bills this year. That would nearly triple the size of IFB’s bond market.
However, the parliament has scaled back the plan to 300 trillion rials ($8.5 billion)—still a lot to handle for the IFB. But Amir Hamouni, IFB’s chief executive, is confident his exchange can handle the influx.
With banks capping their term deposit contracts to a year and offering 18% interest on them, bonds will continue to garner interest.
Their maturities vary from the short to medium term, up to three years. They also yield more—between 18% to 22%, per year.
