Budget Without Oil May Impair Stock Market Performance

The Persian-language economic newspaper Donya-e-Eqtesad, a sister publication of the Financial Tribune, has looked into the future prospects of the stock market in light of “budget without oil” plan. 

To partially compensate for falling oil revenues, the government plans to remove tax exemption on raw material exports and low value added products, divest its surplus property, redefine the price of energy carriers and reform the costly and controversial subsidy regime. 

The head of Plan and Budget Organization Mohammad Baqer Nobakht has said that current expenditures from oil revenues will be cut to zero in the next budget, reiterating the government goal to diversify sources of income in the next budget.

Cutting the multi-billion-dollar energy subsidies is expected to have the biggest impact on the stock market, particularly on the listed manufactures.

Plus and Minus Side 

This in the short term could negatively impact the performance of listed companies as it will increase their expenditure, which in turn, would affect the dividends paid to shareholders. 

In the long-term, however, cutting hidden subsidies will give rise to agility of companies big and small and help promote competition. 

The government pays 13,000 trillion rials ($114 billion) in subsidies every year.  Of this colossal amount, 9,870 trillion rials is paid to manufactures in what is generally known as ‘hidden subsidy’, IRNA reported.   

Depending on the type and scope of activities, manufacturing companies benefit from a portion of hidden subsidies offered at times, and very generously, by the government to help the companies survive. 

The cement industry is one example. It receives up to 100 trillion rials in subsidies every year but barely generate 15 trillion rials in profit. 

Apart from cement stocks, it is predicted that shares in steel, petrochemical, copper and related businesses will also be the victims of a new subsidy regime.   

The government plan to levy capital gains tax on a wide range of businesses plus taxes on exporting raw materials is another factor influencing the performance of the bourse.    

Given the big shares of companies involved in exporting raw material and base products, such as iron ore, sugar, grains etc. in the capital market, levying tax on exports of raw materials could and will impact the profit margins of these companies.  

On the bright side, this may provoke producers to add value to their products and thus increase their profit in the long-run.  

There are speculations that the government may levy CGT on dividends considering the dramatic rise of Iran’s stock market in recent months. This possibility, however,  was dismissed in August by head of the Securities and Exchange Organization, Shapour Mohammadi. 

Tax Holiday 

To encourage investors to participate in the stock market, the Economy Ministry agreed to exempt stock market trade from paying tax. 

According to Mohammadi, the ministry’s green light was based on the premise that the financial performance of listed companies is transparent and the market would help redirect liquidity to productive sectors via the stock market. 

Capital gains tax is assessed on the positive difference between the selling price of an asset and its original purchase price. The purpose of this tax is to reduce the capital gain in unproductive sectors. Most governments adopt policies to inject capital into productive sectors.  

The ‘general revenue’ in the current budget is forecast at 4,480 trillion rials ($39 billion), which is 5% higher compared to last year’s figure.

The government originally predicted oil revenues to be in the region of 1,370 trillion rials ($12 billion) in the current fiscal year, which accounts for 36% of the government’s total revenue. The figure, ironically, indicates higher dependence on oil compared to the previous budget. 

The government’s original oil income forecast was based on exporting 1.5 million barrels/day. The export figure was cut drastically to 300,000 bpd after the budget went through structural reforms in spring to be compatible with new conditions, namely the steep decline in oil revenues.