Iran’s Rouhani economic resistance rut
After a 5% loss from December to end-March, the Tehran Stock Exchange retraced the previous 79,000 point level ahead of May 19 elections pitting the incumbent President Hassan Rouhani against a half dozen approved candidates.
Hardliners Ebrahim Raisi, a protégé of Supreme Leader Ayatollah Khamenei, and Mohammed Baqer Qalibaf, the capital’s mayor since 2005 and a contender in the 2012 contest, are positioned as the main rivals after the ruling clerics rejected former president Mahmoud Ahmadi-Nejad’s surprise application for another term.
In a televised debate, these rivals castigated rising unemployment, officially up 1.5% to 12.5% the past year despite Rouhani’s international nuclear deal for sanctions relief, which restored oil exports to 2 million barrels per day for estimated 4.5% growth, according to the IMF. Their campaign platforms draw on the supreme leader’s “resistance economy” concept, spurning Western foreign investment and advocating self-reliance and higher cash transfers to the poor and struggling middle class.
Rouhani has acknowledged slow improvement in living standards since the accord went into effect in early 2016, and lapses in bank and state enterprise restructuring to boost competitiveness. His description at the time of the “golden page” in history was overstated, and may be further tarnished should US President Donald Trump formally withdraw the US from the six-nation pact, but the stock market is betting he and his team could redouble competitiveness and integration efforts with extended tenure. However, even with victory these reform wishes could again be misplaced by a populist backlash magnified by the race, as the growing tab to rescue government banks and companies again resuscitates recession fears.
In the past four years of Rouhani’s term, the Revolutionary Guard has taken over nominally “privatized” factories and properties, and continues to control large chunks through affiliates of leading stock exchange listings
Raisi was appointed to head the country’s biggest charitable foundation in charge of the holiest shrine in Masshad, with $15 billion in assets, and close ties to the Revolutionary Guard still under Washington’s commercial and financial prohibitions. An Islamic law scholar, he also spent his career working with the security forces and was a member of the notorious “Death Commission” two decades ago that killed thousands of political prisoners. Supporters tout his experience as head of the religious endowment for charting an economic direction that is “pro-people and production” and avoids “social shocks,” according to recent statements. In the past four years of Rouhani’s term, the Revolutionary Guard has taken over nominally “privatized” factories and properties, and continues to control large chunks through affiliates of leading stock exchange listings. Analysts attribute their dominance to the “corruption, mismanagement and lack of regulation” that continue to place Iran in the lower tier of the World Bank’s “Doing Business” ranking.
Raisi has seized on the rich-poor gap and 35% youth joblessness to call for a tripling in budget cash handouts, even though fellow conservatives like the parliamentary speaker Ali Larjani remind him no money is available with the chronic deficit and 60% of the population escaping tax. He may turn to the central bank and state-owned lenders as an alternative for resource transfer, but so-called quasi-fiscal activities are already high and explain the 20 percent annual rise in the monetary base jeopardizing the single-digit inflation target. President Rouhani managed to slash the rate from 40% to just over 10% with relatively tight policies, and hailed such achievements as “actions not slogans” in re-election rhetoric. Diversification from hydrocarbon dependence has been another hallmark, and the non-oil current account is now roughly in balance with almost $90 billion in exports for the end-March fiscal year, the Economy Ministry reported.
However, bank bad loans following local classification rules remain over one-tenth of portfolios, and proposed cleanup legislation that would stiffen guidelines and grant more independent enforcement and resolution powers are stuck in political limbo. The next government may face an outright crisis with “difficult to address” issues including recapitalization and rollback of targeted lending schemes, according to the Industry and Trade Minister. The overdue reckoning coincides with Iranian bank reconnection to the external SWIFT payments network and applications to reopen branches in Europe and Asia, as smaller counterparts beneath the radar of lingering US sanctions forge correspondent relationships. These ties inject new cross-border risk as the dual exchange rate system also awaits modernization, with such obstacles potentially resistant to near-term change by the surviving reform constituency.