Professional Investors Talking about
Iran Experience in Attracting Funds
Iran’s capital market went through many ups and downs in terms of attracting foreign investment in the year passed. Over this year, both foreign investors and the Iranian capital market faced challenges like gaining high return in Iran’s untouched capital market along with existing banking problems and unresolved ambiguities over foreign currency transactions for the former and absorbing foreign investment along with going into the trouble of preparing the required legal, executive, financial reporting and software infrastructures and frameworks to facilitate the process of attracting foreign investment for the latter.
All efforts eventually resulted in the conduct of foreign investment worth million dollars in Iran’s capital market, like never before. Some Iranian bodies and organizations which were focused on offering services to foreign investors, including private banks, brokers and investment banks were paid off to some extent. Although there is still a long way ahead, the experience of attracting foreign resources in Iran’s stock and debt markets, obtained from negotiating and holding meetings with foreign companies, was invaluable.
After efforts and attempts to become a member to IOSCO, Iran’s Capital market regulatory body, the Securities and Exchange Organization, started to look for ways to facilitate procedures and structures for foreign investors’ entrance. Despite the non-existence of institutions like global custodian banks and credit rating agencies in the country, officials are still focused on improving conditions. In fact, the improvement in the country’s banking system relationship with their foreign counterparts and the decrease in the US-made threats and obstacles are expected to enhance foreign currency transactions and therefore, pave the path for attracting foreign investment. Furthermore, the presence of foreign financial intermediaries and law firms in the country in the recent years, although not as much as needed, has also the potential to play a major part in establishing cooperation opportunities and introducing Iran and its investment chances, being more successful in gaining foreign investors’ trust.
It is worth mentioning that Iranian banks have now realized the importance of improving their financial structures, capital adequacy ratio and financial reporting methods in order to rejoin international arena. After years of isolation due to sanctions, resuming and normalizing relations take much time; it will be facilitated by Iranian banks’ taking serious steps to remove inconsistencies with global standards and establishing trust.
In this regard, we asked a few international experts to offer their assessment of Iran in the passing year. Mr. Alexei Yazikov, the Managing Director at First Frontier Capital, has expressed his views on Iran situation over this year as below:
“The year that started extremely well with lifting of international nuclear sanctions eventually turned out to be rather disappointing for Iranian capital markets. The country’s economic fundamentals undoubtedly turned for the better: growth rebounded to over 7% on the back of oil export volumes recovering to the levels last seen in 1970s; inflation has declined to low and single digits; Iran’s external position strengthened with current account comfortably in surplus; forex market stabilized in spite of bouts of volatility with the spread between official and the market rate significantly narrowing. There were also renewed foreign investor inflows in the hydrocarbon, automobile and telecom industries, boosting FDI and laying a foundation for a deeper future co-operation between the West and Iran. However, Iranian banks still face significant difficulties in re-establishing correspondent relationships with global banks and linking Iran with international financial system. Although small-and-medium sized international banks have started correspondent relationships with Iranian banks, the absence of larger international banks continues to hamper trade and investment due to the lack of adequate financing capacity. There is much reluctance on the part of banks to engage in deeper co-operation, not the least because of the remaining US sanctions as well as extremely high compliance burden that banks are facing when doing business with Iran. For the first time in many years, U.S. and EU sanctions on Iran are no longer broadly aligned and commitments of the UN, US and EU under the agreement vary widely, thus raising significant compliance challenges for financial institutions which follow both U.S. and EU rules. To this should be added persistent threat of nuclear sanctions being re-imposed or “snapped back” in the event that Iran has not fulfilled its obligations.
As a result, non-U.S. companies are unable to access the U.S. financial system for transactions with Iranian counterparties. Companies with U.S. bank accounts cannot send or receive funds that are connected to Iranian business. Additionally, companies still face restrictions on doing business with Iranian individuals and entities—even if they are removed from the SDN List—because of continuing U.S. sanctions on Iran’s weapons program and human rights violations. The possibility that Iran may face new sanctions under Trump administration and the ambiguity of existing rules is taking a heavy toll on the cost of business in Iran for international companies and continue to deter international investors from entering Iranian capital markets. Fund managers often cannot include Iran in their Emerging and Frontier markets products for fear of scaring off US clients and are being deterred by potential sanctions snapback and difficulties in executing cross-border transactions. Even for those willing to take additional risks transacting with Iran is far from straightforward – most of the international brokers cannot offer trading in Iran and are not hopeful that the situation will change anytime soon.
All of the above issues kept foreign participation in the Iranian capital market to a minimum and deprived the market of much needed external liquidity. The market’s rise has stalled towards the end of the year in the absence of foreign inflows and continued to weaken. In our view, the major culprit is the new US administration that spells trouble not only for Iran but for frontier and emerging markets at large because of its policies that are breeding volatility and discourages investors from taking risks. The uncertainty is not only holding back foreign investments but also creates unfavorable backdrop for domestic reform agenda and continuity of the current pro-reform administration; if the agreement is derailed, investors may face significant losses and the economy could risk yet another recession. All in all, we see that risks are now to the downside reflecting renewed external uncertainty and a demanding domestic reform agenda that requires broad political support.”
Mr. Spiros Kiritsis, as the President of the Association of Greek Brokerage Companies of Athens Stock Exchange, has also shared his views with us, as below:
“Year 2016 was a turning year for Iran and consequently for the Iranian capital market. As a result of the lifting of the long-standing sanctions, Iran capital market started becoming visible by the international investors, mainly those originated in European Union. A lot of articles and reports regarding Iran started being published on papers or in the wed, and more and more European institutional investors put the TSE index in their ‘screens’. Investors who invest in emerging markets, started to design or even implement specific funds, established in EU, regulated by the competent authorities, having as their investment strategy the Iranian assets which are listed in TSE.
Greek CSDI had signed an agreement with the Iranian one, in order to establish a link between the two depositories and allow international investors’ efficient access to Iranian financial instruments. I strongly believe that New Year will continue the trend of the previous and as the Iranian officials continue their efforts to streamline investment regulations and increase market transparency, and banking collaborations between Iranian banks and EU start to be in place, the EU investment interest will grow rapidly and the Iranian capital market participants will face great opportunities.”
Mr. Payam Malayeri, Asset Manager at Griffon Capital, is another expert who has stated his opinion:
“It was a year where expectations started high and markets reacted accordingly at the start of the year, post JCPOA Implementation Day. However, a gradual realization of both the domestic macro challenges and international obstacles (financial and non-financial) dampened sentiment significantly and capped market gains thereafter. However, with current legacy debt and structural liquidity shortcomings while good headline GDP growth and inflation data, the sustainability of a broader recovery is likely but not certain. Foreign investors’ interest and curiosity have also remained high; nevertheless conversion into FPI or FDI has proved very difficult, namely due to challenges pertaining to banking connectivity and the ongoing concern of US primary sanctions that remain in place.”
Mr. Siavash Jamali, an advisor in InCoPars Advisory also expressed his ideas as follows:
“Iran’s economic prosperity has been the final goal for all administrations and people, which will be realized and accelerated by actions like renovating and restructuring the economy and the attraction of foreign capitals. The first steps to do so, however, must be taken inside the country; in this regard, ambiguity over financial transparency along with determination to approach the banking system to globally accepted standards seem to be of great importance.
Of the major attempts by Iran is the improvement in financial and tax transparency; the government is working on implementation of a comprehensive tax system in the country, a new channel which not only injects new funds to the government but also is interpreted as a step closer to tax transparency; besides, it also plays a major role in gaining trust of those foreign investors interested in foreign direct investment.
Another concern among foreign investors, which is turning them away the most is their mistrust in Iran’s banking system; this problem, fortunately, can be solved by reforming and restructuring the banking system. We should keep in mind, however, that only 1 year has passed since the JCPOA was hit and we cannot obviously expect all the impediments ahead of attracting foreign funds be tackled in such a short period.”
Last but not least, Mr. Mahmoud Bahmani, the Research Analyst at Probus Middle East Limited, told us that:
“We remain positive on Iran’s economic outlook. We believe Iran is a major investment opportunity that cannot be overlooked by emerging market investors. But the scenario might unfold differently from what everyone expected, when the nuclear agreement was implemented in early 2016. We still remain concerned about the transparency in the foreign exchange market, with the multi exchange rate regime and wide spreads. As opposed to the relatively impressive and well-established infrastructure in Iran’s capital market, the foreign exchange market fails to facilitate foreign investors’ needs, who wish to access Iran market.”
Being all said, it is a fact that not much foreign investment experience exists in Iran’s capital market and it is not reasonable to expect foreign funds to flow to the country within only 1 year after the lifting of sanctions and while the Iranian capital market infrastructures are at an acceptable level in comparison with those of neighboring countries, introducing potentials and opportunities in the country to the world requires more time and effort by the Iranian side, calling for a unanimity at a national level. Economic restructurings and reforms are also time taking processes, which need the close cooperation between different financial organizations and institutions in the country to hit the defined targets. Added to this are the ambiguities aroused after the US presidential election, which has caused significant fluctuations in global markets, and therefore, the earnings of our commodity-dependent companies. It is hoped that the passing of time and strengthening of relations between Iranian financial and legal institutions with their foreign counterparts contribute more and more to the resolving of ambiguities and pave the way for the entrance of foreign investors into the country.
DISCLAIMER: This report has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
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