Iran stock market soars but much of economy remains stagnant

Record highs have become routine at the Tehran Stock Exchange as hopes soar in Iran’s markets that the government of Hassan Rouhani will bring about an improvement in the economy and ease international sanctions over the nuclear programme.

The main index, the Tedpix, reached 7,1471.8 on Monday, the latest in series of daily rallies since late last month when Iran’s president attended the UN General Assembly and spoke directly to Barack Obama in the first conversation between presidents of the two countries since 1979. The index has risen by 12 per cent since the New York visit, and by 37 per cent since Mr Rouhani’s surprise victory in mid-June.

However, the rise of Tedpix is partly due to the lack of investment opportunities in other sectors of the economy, which remain stagnant, and there are fears that the index is being fuelled by unrealistic expectations of political and economic reform.

Ali Tayebnia, Iran’s minister of economy, warned last week that any hope for the lifting of sanctions in the near future was “wishful thinking”and reminded the business community that “oil revenues have hugely decreased because sanctions have meant that there has been no foreign investment”.

Mr Rouhani won the election after promising to roll back the populist economic policies of his predecessor, Mahmoud Ahmadi-Nejad, and pledging to resolve the nuclear crisis. Both issues have fuelled high inflation and unemployment.

After the president took office he appointed a strong diplomatic team to handle nuclear negotiations with the major powers – the first round of which will begin on Tuesday – and handed management of the economy to experienced technocrats. Iran’s capital markets took this as a sign that the country would moderate its economic and foreign policies.

“The growth of the bourse is natural and . . . has logical reasons, while changes in [policies of] ministries will help industries improve,” said Mahmoud-Reza Khajeh-Nasir, a senior bourse official.

The index has been buoyed by a jump in production and revenue in the refining, petrochemicals and metals sectors, and by an expected rise in non-oil exports, minerals and agricultural products. Its growth is also a reflection of the country’s high inflation and the depreciation of the national currency, the rial, which has dropped in value by about 50 per cent since last year due to sanctions, helping to reduce the level of imports.

However, the wider economic picture is less encouraging. The latest official figures show the economy contracted by 5.4 per cent over the past year, youth unemployment stands at 28.3 per cent, and inflation has risen to 40 per cent.

Central Bank figures also show food prices in the capital have rocketed over the past year. Rice has gone up by 70.4 per cent, grain by 79.7 per cent, vegetables by 83.7 per cent, sugar by 43.2 and vegetable oil by 46.9 per cent.

Iran’s government hopes to attract some of the liquidity currently boosting the market – estimated to around 5,000tn rials or $200bn – into other parts of the economy, particularly the banking system – which it intends to reform – in hopes that it can help boost domestic industry and housing.

According to Mr Tayebnia around 70 per cent of businesses in the industrial sector are struggling financially and are unable to obtain loans. The previous government’s policy of granting cheap bank loans to the poor and to small industrial businesses has led to a huge rise in defaults, causing a crisis in the banks. Many banks are now reluctant to lend to businesses in the industrial sector.

Moreover, banks cannot attract depositors because interest rates for rial-based accounts are around 20 per cent – half the official inflation rate. This, and the collapse in the value of the rial, has left many Iranians converting their rials into hard currency or gold coins and keeping them at home.

A priority for Mr Rouhani’s government, however, is to increase government revenue and end the monthly cash payments that almost all Iranians have received since 2010 in compensation for reductions in subsidies on energy and basic commodities that have fuelled a massive budget deficit.

Officials have indicated that they may exclude almost a third of those receiving 455,000 rials ($18) each month partly because of a shortage of government funds but also in an effort to drive down inflation, which has contributed to growing rates of poverty.

Hossein Raghfar, a university professor of economics, said the subsidies plan had disproportionately affected the middle class, many of whom have fallen below the poverty line. “During the past eight years under Mr Ahmadi-Nejad, the poor have increased from 22 per cent of the population to more than 40 per cent.”

Copyright The Financial Times Limited 2013.