By Mahdi Goodarzi
Iran has been repeatedly introduced as having a bank-based economy and financing system. As the result of the current credit crunch, which largely originated from frozen assets and disproportionate volume of granted facilities, the growing need for funds has called for drastic changes in beliefs and mindsets towards foreign investment as well as the necessity of applying reforms to make that happen.
By Alireza Hojjatnia
When it comes to Foreign Direct Investment (FDI), it is always better to be safe than sorry. Iran is no different from rest of the world. A rise in a nation’s FDI is hand in hand with uplifting its investment security protocols. The safer the county is, the more investments will flow in. This bond has some measures to be taken under consideration, for each of which, higher scores show a better made bed for Foreign Direct Investment. Despite the endless efforts of Iranians to attract more investments to their country, comparing global investment security indicators demonstrates the ugly truth of nation’s failure to deliver what shall be promised to foreigners.
A well-developed debt market is proven to be a great advantage funding companies and therefore, providing grounds for economic growth in countries. Given the current conditions of Iran’s economy, developing an efficient debt market is unanimously said by experts to be of vital importance.
Debt market has the potential to lower reliance and pressure on banks for financing on one hand and contributes hugely to the government debt settlement by securitizing the debt, using the available mechanisms.
At the first glance, developing this market might seem easier than that of the stock market owing to the rather simpler structure of fixed-income bonds traded. There are, however, challenges ahead, whose identification might be the first step towards realizing this goal, the most important of which, taken from Tejarat-e Farda economic magazine, will be briefly stated below:
By Mahdi Goodarzi & Mojde Rezaee
Of the major challenges with which Iranian manufacturing companies are struggling is the liquidity lack. This comes mostly from banks’ lack of a rating system to properly distribute banking resources in addition to high interest rates on bank deposits, which have raised financing costs.
Considering the still under-developed role of Iran’s capital and debt markets in financing, producers seeking for facilities largely refer to banks. Unfortunately, not only have banks’ troubled balance sheets lowered their ability to grant facilities, they have also been placed in an unhealthy competition to absorb money just to meet their previously made commitments to depositors. The final result has been nothing but higher interest rates on deposits, burdening banks with even more commitments. The rise in interest rates has eventually increased facilities’ prices. Expensive facilities, when Iran’s economy seems to have just kicked recession and showed signs of growth, will threaten the remained active companies’ survival.
By Mahdi Goodarzi & Mojde Rezaee
The 11th Iranian government took office aimed at curbing the inflation rate and boosting economic growth, for which controlling and managing the liquidity volume is a pre-requisite.
Historically investigating liquidity growth in the country proves that nearly all governments have experienced such growth, mostly due to the rise in base money other than the money multiplier; the former is mostly made up of “the Central Bank of Iran’s (CBI) foreign reserves”, “the government and state-run sector’s net debt to the CBI” plus “banks’ net debt to the CBI”.
Although calculated with different base years, average economic growth has approximately been 4% over 1997-2016; besides, the private sector/people purchase power has annually grown by 3.25%.
By Mahdi Goodarzi & Mojde Rezaee
After lowering the inflation rate, the government started to drag other related economic indices down and managed to put the interest rate on a descending path, having supported stricter financial discipline and implemented correct monetary policies. Over the past 4 years, the Central Bank of Iran decreased this rate twice to stand at 15% on banking deposits and 18% on facilities granted.
Despite arising from so many factors, some experts, including Kamran Nadri, the Head of the Islamic Banking Group, see the following three contributing the most to sky high interest rates: banks’ weak financial and monetary structures resulting from credit crunch, high cost of money and overdue claims plus deposits flow to parallel markets which raises the probability of banks’ assets getting stuck. As long as such reasons exist, lowering the interest rate by decree will not yield any results but the weakening of state-owned banks.
By Alireza Hojjatnia and Mahdi Goodarzi
“The first step toward success is taken when you refuse to be a captive of the environment in which you first find yourself – Mark Caine”
As tempting as “Iran Capital Market” sounded at first, now it is no news that the reopening of what the world call “one of the last untapped emergings of the world” walked sprightly like a pigeon and sat like a tortoise. The expectations were topped the sky and in operation everything happened much slower than anticipated. There are awful lot of writings that addressed the issue, yet non measured the domestic facts against realities of the world.
By Mahdi Goodarzi & Mojde Rezaee
Over the past decades, Iran’s economy has been suffering from challenges originating from its mere reliance on the banking system for finance; the situation now calls for more attention after the recent re-openings in the country since the JCPOA was hit because the country’s economic growth has been limited due to ignoring the capital market potential, which is interpreted as one of the major factors driving developed countries’ growth.
By Mahdi Goodarzi & Mojde Rezaee
In every sitting with foreign investors interested in Iran’s market, whether they intended to do FDI or FPI, fluctuations in foreign exchange rate in the country had always been on top of their concerns. Unfortunately, it became even worse when they would realize that there were no instrument and/or mechanism to hedge such volatilities and they were (and still are) usually forced to accept them and resort to indirect methods to secure themselves to the extent possible (this is, for instance, true for investors interested in the stock market and purchasing shares of companies which export their products). Below, we have tried to discuss the importance of defining a path to take steps towards FX rate unification in Iran, in addition to explaining attempts done so far.