Iran’s Capital Markets: Securitizing the Future
The future of the Iranian financial sector might be vastly different to what we—those who work in the industry– can imagine today. With this in mind, the potential for making the financial sector a driving force for Iran’s economic reboot must considered as supremely important.
For Iran to overhaul various aspects of the domestic economy, it must attract at least $1,000 billion dollars in investment during the next decade. If for any reason our economy fails to absorb the required level of investment, not only will we not achieve the goals of Iran’s 2025 Vision Plan, but we will also miss a historic opportunity to enhance our rightful position in the global economy.
Therefore, it is our obligation to obtain the much-needed investment for Iran.
The unusual hurdles imposed on our economy have culminated in an unfortunate economic stagnation. This situation has adversely impacted a country with an enormous potential, which would otherwise be most appealing to the international investor.
In order to ensure sustainable economic growth, Iran will need to divert considerable financial resources into infrastructure and large-scale projects. These projects may be unprecedented in size and complexity for Iran.
The key point is that conventional methods for promoting investment in Iran, particularly foreign direct investment, have become less appealing and are insufficient to effectively address international investors’ concerns, especially after exposure to the world economic crisis.
In the case of Iran, this is further aggravated by the harsh conditions imposed on investment due to sanctions. Knowing this, two factors have a crucial role in leading potential investors: transparency and the ease of exit from ventures, i.e. favorable exit strategies.
Iran’s finance sector leaders will need to be flexible and innovative in financial engineering and offer a range of financial instruments to investors, either domestic or foreign. This leads to the conclusion that for those of us in the sector there is no strategy more important or effective than securitization.
Securitization is the financial practice of pooling various types of debt, illiquid assets, and/or groups of assets into more liquid financial instruments in order to sell them to third party investors. Securitization promotes liquidity in capital markets by making it easier for investors to buy and sell (enter and exit) investments across sectors.
During the last decade, various new types of project financing methods have been devised for infrastructure investments in Iran. Compensation Arrangements, ranges of Build-Operate-Transfers (BOTs), and, recently, Public-Private Partnership agreements (PPPs) alongside the issuance of participating notes, corporate bonds and Sukuks are examples of our endeavors for financing projects.
Despite our achievements, we do not fully realize the imperative of giving potential investors even greater confidence through intelligent securitization. I have to stress that investors are clever people, they know how to assess projects and how to control their business risks, but they need the right vehicles.
By confidence I mean providing investors with transparent and reliable information as well as reliable platforms for transacting securitized projects and investments. Investors must be confident that whenever they decide, they are able to sell their investment at a fair price.
Therefore, I believe that securitization, though not the only way the only imperative to improve the investment climate, is nonetheless critical. Securitization offers the best and most efficient methods of financing the country’s projects in the post-sanctions era in the shortest period of time.
Now the question is what are the required grounds for new best-practices?
Certainly, we need to review our legislative environment and implement the required amendments, remove the unnecessary barriers and in general, improve our “doing-business” indices. In addition to the above, Iran’s finance marketplaces remain a vital part of this development plan. Specifically, securitization needs markets where assets can be effectively valued and traded.
A notable point is that Iran has the oldest capital market in the region, established in 1968. With almost 50 years of experience, Iran has a robust background in this area and thanks to the new Securities Market Act, ratified by the Parliament in 2004, the country has had the opportunity to modernize its financial market and establish almost all the frameworks required by global best-practice.
I will not elaborate on the structure of Iran’s capital market here, but it is worth mentioning that during the past decade, we have observed tremendous developments in the fields of financing, financial markets administration, and related technologies.
These changes include a notable portion of the privatization program within the framework of economic reforms, which was carried out through the Tehran Stock Exchange (TSE) and the Iran FaraBourse (over-the-counter market).
The Iran Mercantile Exchange and Iran Energy Exchange, too, have had an important and constructive role in improving commodity markets’ efficiency and transparency in our economy, which deserves its own detailed discussion. However, it is noteworthy that the share of the contribution of the capital markets to Iran’s GDP is still unsatisfactory.
Where the main impetus behind long-term sustainable economic growth is national and foreign capital investment, it becomes imperative that new methods based on securitization be devised, which at the same time make further development of the financial markets a necessity. We, therefore, need to introduce new players in our financial markets including new companies and entities, which can develop new and innovative methods, products, and instruments of finance based on securitization, educate a new generation of specialized experts, enter joint ventures with reputable international firms, obtain and develop new systems in the area of financial technology, and more.
International investors continue to recognize that the Iranian financial sector, with its great potential, will be one of the most active, (and hence profitable) industries in the region. But these investors will only act with confidence once sanctions are lifted and Iran’s new phase of securitization and transparent sector development begins.
Photo Credit: The Iran Project