Challenges Ahead Iran’s Debt Market
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:
Stability at Macroeconomic Level
The number one challenge appears to be macroeconomic instability; fluctuations and unpredictability in some key indices like the inflation rate reduce companies’ tendency to invest in long term projects, pushing them towards those that allow them to change their strategies in case of any drastic change in economic atmosphere with more ease. In fact, releasing bonds with long term maturities in the country, with the current high interest rates, is something that neither the issuer (who hopes for lower interest rates) nor the investor (who fears that the issuer might fail in delivering its promises) is interested in becoming committed.
The instability in policy making is another problem. With Iran’s not-independent Central Bank, there is always the possibility for the government to force the bank to lend money in case of any budget deficit or non-payment of the bonds issued. All in all, the government might add to the volume of liquidity and inflation rate by its financial indiscipline and imposing its expansionary monetary policies.
Valuating the Bonds
The importance of a liquid and fair market, that covers a wide range of bonds with different maturities, is secret to no one. Nevertheless, governments are usually tempted to finance their projects/plans via the banking system, which will prevent bonds’ fairly valuation, depriving them of becoming a pricing source for setting other rates. In this regard, the role the capital market can play in pricing bonds is of utmost significance.
In late 2016/17, the debt market was blamed both by the money market and the stock market. Monetary officials assumed that bonds’ high yield rates, arising from poor management of the volume of issued bonds, distorted the path to lower the interest rate on bank deposits. Market practitioners, on the other side, believed in the migration of resources from the stock market to the debt market. These critiques resulted in the government putting an end to issuing such bonds in this market for a while. Lack of proper pricing and valuation mechanisms, then, ended in the wild and sudden growth of bonds’ yield rate, which later necessitated a directive by the CBI announcing the re-trading of such bonds in the stock market.
While the presence of institutional investors, including pension funds and banks can benefit the debt market, their unhealthy conditions, their deficits and credit crunch have made achieving a developed debt market difficult.
Poor law/regulation in supporting investors’ rights is another challenge. In fact, the existence of a competent judicial system as well as regulations to assure retail investors’ rights fulfillment in case of the issuers’ bankruptcy and failure to meet their promises can help considerably in accomplishing this target; the pertinent law and regulation are in need of revisitation.
Lack of Credit Rating Agencies
Considering the importance of credit risk estimation, lack of (well-known and also international) credit rating agencies in Iran has worsen the situation. Although guaranteeing the principle and its return by banks or investment companies has succeeded in postponing the occurrence of any failure in the short term, the entrance of such companies will contribute a lot to attracting market practitioners’ trust. In this regard, the Securities and Exchange Organization of Iran has taken steps to prepare instructions for establishing such companies, which has been recently amended as well.
Following the enactment by the SEO’s Board of Directors dated 9 November 2016, active exchange markets in Iran’s Capital Market, i.e. Tehran Stock Exchange, Iran Fara Bourse, Iran Energy Exchange and Iran Mercantile Exchange, plus all banks and financial and credit institutes licensed by the Central Bank of Iran were banned from participating in credit rating agencies’ shareholding structure. In its latest approval, however, dated 30 August 2017, the said banks and financial and credit institutes are allowed to participate only indirectly and up to 10%.
Being all said, developing the debt market will face more challenges in comparison with the stock market, which seems to be more complicated in developing economies like Iran’s. Besides, developing such a market will hit obstacles if done without a comprehensive approach and proper policy making for reforming other macroeconomic policies, which establish stability, and eventually enable investors and issuers to predict the economic atmosphere and take a long-term perspective.
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