Financial Markets E1:R4
◢ The markets have regained momentum with investors reacting positively to plans to lower the bank lending rate to 10% this Iranian calendar year
◢ Iran's financial markets regulator, the Securities and Exchange Organization, has a new head, widely respected by investors
New Rates, New Regulators
The TEDPIX index rose 1,711 points or 2.3% last week to close at 76,255. Additionally, trading volume on the TSE rose by 128% this week as the markets regained momentum. Investors were reacting in part to news from Valiollah Seif, the governor of the Central Bank of Iran that CBI was committed to cutting the bank lending rate to 10% by the end of the current Iranian calendar year (ending 21 March 2017). Reaching this goal likely entails a rate cut to 12% in the autumn, down from the current rate of 15%.The challenge however will be to continue to lower rates in the face of a rising money supply, which reached IRR 10.38 quadrillion at the end of the Persian calendar month of Ordibehesht (ending 20 May 2016) up from IRR 10.01 quadrillion at the end of the Persian month of Esfand (ending 19 March 2016).
There was also a shakeup in the financial markets regulator, the Securities and Exchange Organization. Shapour Mohammadi has taken the reigns as head of SEO replacing Mohammad Fetanat.
Mohammadi is highly regarded as a forward thinking redulator. He is the direcotr of the Financial Management Group of the College for Management Studies at the University of Tehran and was the first managing director of the Iran Energy Bourse. He has also served as the secretary general of the Center for Iran Investment Institutions, and on the boards of the Atiyeh Andishan Mes Investment Company, Mes Sarcheshmeh Investment Company, and Kerman Ferro Molybdenum Production Company. He is additionally a member of the Investment Council of Iran Insurance Company, and the High Research Council of Bank Sepah. Owing to his extensive experience both as a regulator and within management of major companies, investors have reacted positively to the appointment.
Analysts believe that the timing of Mohammadi’s appointment was to prepare the grounds for the long mooted government bond sale, expected to amount to IRR 600 trillion. Additionally, the government announced this past week that it would allow the Ministry of Economy and Financial Affairs to release bonds with a total value of IRR 125 trillion in order to clear its debts to individuals and institutions.
Reducing bank lending rates clearing government debt will remain the two most important measures that the Rouhani government will take until the end of the current Persian calendar year of 1395 (ending 21 March 2017). The government is relying on both measures to reduce the financial burden on industry, increase the capital flow and eventually improve Iran’s business environment. The Rouhani government is invested in the success of the private sector, as such creating favorable conditions for the capital market is crucial. This is especially true as the Guardian Council announced that the next presidential election in Iran will be held on 20 May 2017. Accordingly, only 10 months remain in the Rouhani’s tenure. The administration is very likely to step up its efforts to push ahead certain key economic plans, providing the impetus for President Rouhani to gain the upper hand in the upcoming presidential campaign. Investors will be watching the campaign closely.
Following the CBI decision to lower the bank lending rate, the proportion of liquidity has decreased in the banking system and has instead moved to the capital market. To the same effect, the debt market has attracted a huge volume of liquidity.
We believe that the attractiveness of Sukuk papers, as well as participation bonds and the securities with high rates of return have been instrumental in attracting a large portion of liquidity to the debt markets. Liquidity has been such in the debt markets that sellers of debt instruments are often able to find buyers immediately.
In the past week, the transaction value for the debt market reached IRR 1.140 trillion. The market welcomed the offering of Islamic Treasury Bonds and IRR 473 billion in purchases were made.
Over the past week, the dollar gained 1.1% against the Iranian Rial to reach its highest point in the Persian year to date (year 1395, starting 21 March 2016).
Upward pressures on the USD/IRR rate from past weeks still exist. The summer holiday season is still not over and volatility in the currencies of Iran’s neighbors continue. However, a potential CBI plan for a single market rate for the dollar has made currency traders conservative in their trading and may threaten this upward movement from past weeks.
Last week, the CBI intervened several times to supply the market with dollars. In the short term, this appears to have sufficiently curbed the USD/IRR rate. Nevertheless, the same upward pressures on the USD/IRR rate are expected to remain over the next weeks. We do not expect this rate to fall below 35,000 as we expect the government to continue to release dollars onto the market as dictated by increasing demand, a process that may cause fluctuation.