News ID: 194299
Published: 0640 GMT June 07, 2017

Financial market reforms can boost Iran's economy

Financial market reforms can boost Iran's economy

By Gary Kleiman*

Tehran Stock Exchange index rallied to eliminate its five percent loss since the beginning of the year after Hassan Rouhani won a second term in mid-May.

With the momentum of victory and technocrats in charge at the Central Bank of Iran and key ministries, long-awaited financial sector overhauls could finally draw in foreign direct and portfolio investors, who have visited in droves with minimal allocation to date estimated at less than five percent of equity turnover, Financial Times wrote.

Over 200 Asian, European and Middle Eastern lenders have forged correspondent relationships, and China's ICBC, South Korea's Woori and Oman's Bank Muscat are establishing local branches.

In turn, Iranian banks are expanding and reviving their cross-border presence in London and local European markets such as Turkey and credit and debit card integration has been set up in Azerbaijan, Iraq and Russia.

In theory, foreign banks can acquire minority ownership in local counterparts, and the biggest state-run, partially privatized and purely private banks are listed on the Tehran exchange.

The top three — Mellat, Saderat and Tejarat — control about 60 percent of assets, and government shares could be further divested under a plan to complete hundreds of state enterprise transactions this fiscal year just released by the Economy Ministry's Privatization Organization.

In early 2015, before the nuclear accord, Rouhani convened a national conference to debate industry modernization and rehabilitation. Officials subsequently introduced contemporary Basel and International Financial Reporting Standards, and submitted bills to expand CBI supervisory and enforcement powers and institution management and operating responsibilities.

Banks were ordered to divest non-credit real estate and securities activities over three years as they focus on core balance sheet repair, but the non-performing loan rate remains over 10 percent, according to September 2016 CBI figures, and capital adequacy has fallen to five percent under stricter measures requiring $5 billion in emergency injections under the latest budget.

Financials have been the worst-performing shares for several years, with the benchmark borrowing rate still punishingly steep at more than 15 percent, an attempt to quash demand as banks struggle to repay long-term deposits yielding 20-30 percent from the period of 40 percent inflation early in Rouhani's term.

Financials also have sizeable exposure in property, which has been in a five-year recession, and the government has accumulated massive contract arrears from the sanctions era, which it has just started to whittle down by issuing new bonds as part of a broader capital markets development strategy.

The Tehran bourse is a leading member of the Istanbul-based Federation of Euro-Asian Stock Exchanges and has committed to aligning trading, regulation and corporate governance with prevailing emerging market standards.

Following experimental placements by the Treasury, fixed income activity has grown to $8 billion and Turquoise Partners — a top market-maker for foreign investors, launched a dedicated sovereign bond fund several months ago.

 

 

*Gary Kleiman is senior partner at Kleiman International Consultants, a global emerging economy and financial market advisory firm.

   
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