People walk outside the Tehran Stock Exchange building, Iran, January 17, 2016. REUTERS/Raheb Homavandi/TIMA
A cautiously confident 2017 has resulted in an increasingly diverse basket of companies looking to Iran’s capital markets for their finance raising needs. Anxiety over the longevity of the JCPOA following statements stateside continues to concern foreign investors, and locally high interest rates are forcing the Central Bank of Iran to step in.
It is not lost on would-be investors that while Iran’s real economy, including production, agriculture, mining, and goods and services delivers 10% of GDP, its financial universe stumps up 25%. The Middle East’s fourth-largest economy annually sees around USD100 billion of oil transactions alone. Meanwhile, the Tehran Stock Exchange (TSE), established in 1967, and demutualized in 2006, is the vanguard of a drive to develop the nation’s capital markets to international standards and an ultimately sustainable scale. The TSE saw stellar 88% growth in market cap over the four years to 2016 from USD52 billion in 2012 to USD99 billion, rendering it the Middle East’s fifth-largest stock exchange after such giants as Saudi Arabia (USD600 billion), the UAE (USD250 billion), and Qatar (USD200 billion).
A cautionary tale
At the outset there were just six listed companies, but today there are 326, the credibility of which is strictly monitored. In fact, many applaud the Central Bank of Iran’s (CBI) willingness to sacrifice activity at the bourse to safeguard long-term integrity. In 2016 it suspended the trading of various banks deemed to have fallen short of stipulated reporting standards, including leading lender Bank Mellat. In fact, 56 companies with a combined market value of USD22.2 billion have seen suspension to spur commercial transparency. And early in 2017 it shelved IPOs, deeming the climate insufficiently supportive; a condition now reversed.
At the end of 2017, there were 878 licensed investors on Iran’s capital markets, of which 209 are institutional entities. The bourse continues to build on prospects of international proximity to be reaped from the Joint Comprehensive Plan of Action (JCPOA). May’s reelection of President Hassan Rouhani, a signatory of JCPOA, too, promised bourse-friendly continuity, despite the murmurs of local hard-liners and Trumpist rhetoric stateside.
In truth, it has not been politics per se, but economics that have curbed capital market activity, the obstacle being prevailing high interest rates, as banks offer safer yields. Small wonder that the value of TSE’s stocks shed 37% value in 1H2017. Interestingly enough, the CBI has since curbed banks’ deposit interest rates to 15%, from the commonly available 18 to 22%.
One word of caution in the market comes from Gholamhasan-Taghi Netaj, the CEO of Ghavamin Bank, is for investors to mind the gap. “Something that is special for foreign investors in Iran is the current space between the real (production) economy of Iran and its bank or monetary economy. Iran’s real economy, including production, agriculture, mining, and goods and services, accounts for 10%, while finance makes up 25% of the economy. It is very important that they do not ignore this. If investors want to have interaction with these parts of the economy they should understand this reality because if they do not pay attention to this gap their money and resources will be wasted.” At the same time, he forecasts the gap between the real economy and the monetary economy to lessen with an inflation rate of around 10%.
A first for the local capital markets was achieved in September as the Iran Financial Center (IFC) signed a two-year vending agreement with Greek vendor Inforex. Accordingly, the IFC will inform Inforex on listed Iranian companies for data dissemination to interested foreign investors. Notably, Inforex’ existing presence in Greece, Turkey, Cyprus, the UAE, Oman, Qatar, the Balkans and also the UK, Germany, and France expands the bourse’s international reach.
This movement towards Europe should come as little surprise, and it mirrors the wider finance culture in Iran as well as the industrial sector, which similarly looks towards Europe. In TBY’s 2017 analytics, which is a review of all of the interviews conducted across the Iranian economy for our 2017 publication, we found that 44% of interviewees had operations in or were exporting to an overseas country.
The primary partners were Iraq, Germany, Pakistan, Oman, the UAE, Turkey, Turkmenistan, Afghanistan, and India. Interestingly, only 7% of interviewees have connections to the UK, far below Germany who was a partner and/or export market for 21% of interviewees that had business overseas.
Evidently, the Brexit process is impacting business decisions in Tehran as Hamid Tehranfar, member of board & vice managing director of Bank Saderat explained to us, “We seek to strengthen our position in Europe and believe Vienna is particularly important. After Brexit new financial centers in Europe will emerge, and we believe Vienna may become the next financial hub of Europe. Therefore, we are studying these possibilities in order to have a more efficient international strategy.”
Ceteris paribus, we may expect to see further depth added to the TSE and further tentative interest from foreign institutional investments. Reza Sarafraz Yazdi, CEO of Agah Group, sees this as an irreversible change fueled by the demand for capital from the wider economy. Regardless of geopolitics, he explained, “A policy has been put into place that intends to direct short-term working capital needs to the banking sector, while long- term needs are to be referred to the capital market. Due to Iran’s capital market efforts to use new financial instruments, we expect to see the market play a more decisive role in the near future.”
*This content is an updated excerpt from TBY Intelligence’s 3Q2017 report on Iran’s capital markets