Iran's nuclear negotations with the world look poised to progress later this year, but the immediate and longer-term prospects for the Iranian economy, particularly its volative stock market, appear more uneven.
Though President Hassan Rouhani’s administration has taken steps to deal with the country’s devastating recession, it’s clear they’ve fallen short. “The medium-term future of the stock market is encouraging, provided that the nuclear negotiations between Iran and the 5+1 group [the United States, United Kingdom, France, China, Russia, plus Germany] are successful and sanctions are lifted,” says market analyst Reza Safari. “In the short term we might see some positive movements in stock prices but the market recession continues.”
Iran’s investors couldn’t agree more: earlier this summer, a group of them wrote to Rouhani, urging him to take drastic, immediate action to reverse the recession—a tall order, given the uncertainty around the further lifting of sanctions.
“On average market investors have lost over 30 percent of their capital and in some cases over 50 percent,” the group of stock market professionals told Rouhani. “Throughout this period none of the government’s promises have been fulfilled. The situation is actually worse, with very low investor confidence.”
Since December 2013, the stock index has fallen from 89,000 to around 72,000. Smalltime investors have been hit hard, with no signs of encouragement in the bigger markets either.
Take Hamid, who owns a gold foundry in Tehran’s main bazaar. After his father passed away two years ago, he invested his entire savings into the stock market in an attempt to escape the economic recession that had idled so many manufacturing workshops in recent years. He planned to start a new chapter in his life and have a family. He may well be regretting that decision now.
Stalled Negotiations, High Food Prices and a Plan That Falls Short
When Rouhani took office last summer, the market index stood at about 55,000. The president encouraged optimism and investors' hope for improvement. “From now on you will witness an increase in investments and economic activities as a consequence of agreements with foreign governments,” he promised when briefing the country on his first 100 days in office. “In just a few days, the stock market has been mobbed by investors, and particularly in sectors where sanctions have been removed.” Many investors believed this was the perfect time to invest in the stock market.
During Rouhani’s first seven months in power, these hopes enabled the market to grow by 100 percent, from 45,000 in mid-June 2013 to 89,000 in mid-January 2014. But as nuclear negotiations dragged on and the certainty of a final agreement diminished, Rouhani’s government brought in contractionary fiscal policies to close the inflation gap without having a clear strategy as to how to support productive sectors.
As a consequence, food prices jumped up, housing loans increased by 75 percent and the number of sell orders by major investors was made public. leading the country straight back into recession. In a very short time, a market that had enjoyed seven months of uninterrupted growth was thwarted. People rushed to sell their stocks. The recent slump is the most significant fall since the Tehran stock market was established in 1990.
In a recent bid to regain market confidence, the government brought in a plan to insure stocks. According to Hasan Salehian, a market analyst who spoke with IranWire, the plan has met with mixed reactions. “On the positive side, these financial instruments can cover major stockholders, provide them with a guaranteed minimum profit and give direction to stock buyers. They send the message that the stocks of insured companies are more valuable and secure for investment.”
On the negative side, he said, the actual coverage for stock insurance is restricted. “It can only cover between 20,000 to 100,000 shares for each listed entity and a maximum of 300 million rials (less than US$12,000) for each. Since most major stockholders invest several times this number, the insurance plan would not provide them with much security in practice.”
For many investors, these mechanisms fall short because of the associated insurance policies, which in many cases expire after six months. If an investor wants to sell his shares before that six-month period is up, the insurance will no longer be valid and an investor’s capital will not protected. Many have suggested that a shorter time period—such as three months— would offer a better chance of success and financial output.
It’s not just the insurance that is flawed. “Iran’s market has two major problems,” says Salehian. “On one hand the shortage of liquidity has caused a recession. On the other, the market is suffering from a lack of confidence in the government’s policies and economic plans.”
Analyst Reza Safari believes the stock market has the potential to become one of the most important channels of foreign investment in the country. "If the government can help to increase liquidity in the market, bring back security and stability to the country’s economy and fulfil its promises,” he says, Iran’s stock market could really explode.
But between sanctions and the continuing slump, small investors such as Hamid, who tried to find simple solutions to financial hardship, now find themselves caught in a much bigger trap: with the stock market tumbling and most sanctions still in place, it seems the country’s business environment is far from recovery. Rouhani and his administration need sanctions to be lifted in order for a real improvement to be seen. In the absence of this, other, more immediate measures must be taken. Otherwise, not only will the economy continue in freefall, but those in a position to help support Iran’s recovery will lose even more confidence in the government, increasingly being seen as an administration that breaks promises.
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