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Financial Markets E1:R5

Financial Markets E1:R5

Key Developments

◢  Export-focused sectors have been given a boost by CBI steps towards a unified currency rate 

◢  The refinery and mining and metals stocks drove another week of gains on the TSE, buoyed by improved outlook Iranian market share in global trade 


 

Tehran Stock Market

The TEDPIX rose 1657 points in the last week, or 2.1%, with the refinery and mining and steel sectors making the biggest gains, on the back of recovering oil and commodity prices. The prospect of unified FX rates has also boosted investor confidence in these export-focused sectors. 

 
 

Of note, the money supply has increased to IRR10 trillion and the total value of the TSE and Farabourse has reached IRR 3.7 trillion or 37% of the money supply, down from an average of 44% in the 10 years prior. This increased money supply indicates should result in stock market gains. It is worth knowing that the ratio once reached 95% in 1392 when the TEDPIX reached a historic peak.

As we mentioned in our last report, the head of the Securities and Exchange Organization was recently replaced. We continue to hope that the development will prove to be a strategic decision by the government in last year of this Rouhani term. The government is also continuing its campaign to further curb inflation, cut interest rates and eventually unify FX rates in the coming months. All these efforts are expected to affect the market positively.

On the other hand, officials are hoping to address financial and banking problems in the second half of the fiscal year, with some hoping that free banking interactions with global financial institutions would help the Iranian capital market and industries grow further. In one such step, the first vice president recently approved tax holidays for companies that have raised capital through asset revaluation between 1392 and 1394.

Meanwhile, year on year inflation has recently reached 6.6%, which has been good news for those approving of the government’s monetary and financial discipline. It is our belief that if monetary discipline is coupled with political stability, we should see lower costs of financing for industries and lower interest rates as well as increased demand for credit in the manufacturing sector. To complement government policy, the banking system must be reformed as soon as possible.

Several sectors warrant a closer look. The banking sector has been negatively affected by salary scandals and a tough Central Bank policy regarding bank reserve ceilings and financial statements. Additionally, a bill that seeks to reform the banking sector is still making its way through parliament. With quarterly financial statements having been released, we have seen weak performance from Ansar, Karafarin, Hekmat and Middle East Banks in both, particularly in the area of rising costs. Meanwhile, some banks are still refusing to lower deposit rates despite official calls for cuts.

Meanwhile, the rise of global commodity prices and the continuous devaluation of the Iranian Rial against major foreign currencies, coupled with growing optimism about the post-sanctions era in Iran, have made for a bullish market conditions for the metals and mining sector. Additionally, government plans to attract foreign investment for major development projects in mining and metals is also driving stock prices to rise. 

Bond Markets

Last week saw the trading of more than IRR 909 billion worth of treasury bills. In particular, the bill AKHZA6 saw IRR 440 billion worth of transactions. As before, AKHZA6 accounted for more than 40% of the total transactions in the bond market. AKHZA6 is currently trading at a steeper discount and is set to mature later than other treasury bills.

 
 

Currency Market

In the first week after the Central Bank’s announcement that commercial banks are allowed to trade foreign currencies at the market rates, the USD/IRR rate fell by 0.4%.

The CBI has made public its ambition to unify FX rates. Since the signing of the Joint Comprehensive Plan of Action, Iranian officials have repeatedly voiced their desire have a single foreign exchange rate in the market. However, that plan has been delayed until the end of this fiscal year due to problems related to Iran's continued isolation from international banking. 

 
 

Under the new decision made by the CBI, a number of FX trades and actions have been expanded to entities other than banks. In the past, for example, exporters did not have the option to make deposits in FX. Officials argue that the new decision will make the currency market more competitive, since not only bureau de change but banks can affect the pricing process of foreign currencies especially that exporters are now allowed to deposit their revue in foreign exchange.

Although the CBI has only just announced the intended update to policy, the decision has already had an impact on the foreign currency market. On Saturday and Sunday, transfer rates for the Dirham fell and the foreign exchange index dropped by 80 rials. The transfer rate, however, rose in the middle of the week as the value of the US dollar increased in Turkey and accordingly increased in Tehran, though falling again days later. We believe that the real impact of the CBI’s decision will have to be assessed in the long run. In the last week, the dollar rate received little impact from volatile currency markets in the neighboring countries; so, the dealers continued to trade currencies. So it is predicted that the market would be relatively stable in the coming days.

In the past few weeks, the US dollar has been appreciating in the Iranian market, but the CBI decision to expand FX operations seems to have put an expectation cap on the dollar rate in Tehran. This led the dollar value to drop from 35,500 rials in the beginning of the last week to 35,350 rials in the end of the week – a 0.4% decrease.

The CBI’s latest decision seeks to close the gap between official and parallel FX markets. However, the CBI’s regulatory role in the FX market remains to be seen, as the presence of banks in the market could lead to a rise in FX reserves. On the other hand, the new policy allowing exporters to make FX deposits should see the release of FX reserves currently held by households, providing a boost to the supply side of the foreign currencies.  

Financial Markets E1:R6

Financial Markets E1:R6

Economy + Policy E1:R5

Economy + Policy E1:R5