Business | Iran’s markets squashed in post-sanctions sentiment

Iran’s markets squashed in post-sanctions sentiment

Gary Kleiman December 23, 2016 1:17 AM (UTC+8)
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Iranian shares, after falling 5 percent in the wake of President-elect Donald Trump’s victory and vow to end the “worst in history” anti-nuclear sanctions-lifting deal struck a year ago, recovered through mid-December with flat index performance through this fiscal year beginning in March.

The new administration in Washington will include hard-liners on the core national security team such as nominated intelligence director Mike Pompeo, who recently blasted revised Treasury Department guidelines that could in principle permit US ventures with Iranian firms minority owned indirectly by the Revolutionary Guard. In its waning days the current Congress passed a decade extension of existing commercial and banking system prohibitions despite President Obama’s objections, and also pressed for additional review of a breakthrough US$18 billion Boeing jet sale.

However other international signatories of the January 2016 Joint Plan of Action (JPOA) have jumped in to revive business ties with Tehran. Small European banks have entered correspondent relationships; France’s Total and China’s national oil company will invest $5 billion in the South Pars field as production has returned to over 2 million barrels/day; and Russia in December agreed to dozens of projects including a free-trade zone and joint Islamic bank over a 5-year period. The foreign partner split comes against mixed economic picture in the IMF’s latest Article IV consultation, which cited growth and inflation improvement alongside lingering financial and private sector policy doubts which will continue to deter investors amid headline country leadership changes and possible JCPOA withdrawal.

US supporters of bilateral rapprochement and trade resumption have already mobilized to press the incoming Trump administration about the 75,000-plus jobs at stake with the Boeing transaction. The Iranian-American Council released a study estimating the cost of sanctions over the decades at around US$250 billion in foregone exports, and at US$100 billion just the past two years.

Europe relinquished in the range of US$40-150 billion from 2010-14, with Germany suffering the most, it added. In October the EU, at Greece’s instigation, broke with the US to lift remaining curbs on Bank Saderat, Iran’s main export intermediary punished for funding terrorist activity. Earlier this year most Iranian banks were reconnected to the SWIFT payments network, but cross-border ties will continue to be hampered by official warnings of lax anti-money laundering rules. Currently a global investigation surrounds the alleged diversion of proceeds through Venezuela in order to access dollars and circumvent JPOA limits.

The Revolutionary Guard is the chief target of remaining direct overseas boycott, with its estimated control of one-quarter of the economy through a vast state-owned banking and corporate labyrinth. It bought the biggest telecoms firm in a so-called “privatization” under the previous administration, and now faces new competition from Vodafone which recently joined with a local partner.

Despite dominance it has also begun to lose government contracts, such as a December $650 million shipping order that went to South Korean builders. The Guard, which is also a leading institutional investor on the stock exchange, is in foreign executives’ view not only a security but economic modernization threat, and is largely to blame for the 120 out of 190 country ranking in the World Bank’s Doing Business index.

GDP growth will be in the 4-6% range for the fiscal year through next March on rebound from recession, with expected 9% inflation, according to the IMF. The new budget submitted by President Rouhani, likely to run for re-election in mid-2017, raises spending 7% to US$100 billion in part to repay outstanding bills from the pre-nuclear deal period and to recapitalize ailing public banks with bad loan ratios calculated at 20-30 percent if standard classification rules were appied. Legislation is under consideration in parliament to strengthen regulation and establish central bank independence, but may be delayed indefinitely with the political cycle and opposition by conservative lawmakers who champion the post-revolutionary nationalized Islamic system.

Banks have underperformed on the stock exchange with profit declines from traditional lending as well as hits from foreign exchange trading, as the dollar surged after Trump’s win from 36,000 to 39,000 rial in the parallel market. It has yet to be unified with the official one despite years of promises, as foreign investors await convincing economic and financial sector as well as foreign policy direction before increasing negligible equity positions.

Gary Kleiman
Pioneer and recognized expert in the field of global emerging economies and financial markets. Founder of first consulting firm dedicated to providing independent analysis and advice to public and private sector clients in 1987, and research coverage and firsthand experience covers 75 countries in all developing regions. Advisor on financial vulnerability issues, risk management, portfolio allocation, and financial sector and capital markets strategy and development.
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