Foreign Investment in Iran Capital Market Increased 20-Fold Between 2013-18

EghtesadOnline: In an analytical report on the performance of sectors enshrined in the framework of the Sixth Five-Year Economic Development Plan, the Plan and Budget Organization has looked at the performance of the capital market between 2013-18.

News ID: ۷۴۶۵۲۶

20 January 2019

The sixth FYEDP covers the period from 2017 to 2022 is the third development plan related to the country’s 20-Year Vision.

The PBO says total foreign investment in the capital market grew 20-fold over the five-year period between 2013-18. The value of investments shot up from 878 ($7.7million) billion rials in 2013 to 18 trillion ($157 million) rials by March 2018.

The capital market contributed to financing by an annual average of 679 trillion rials ($ 5.9 billion) (not including the contribution of financial institutions) during the five years, jumping from 144 trillion rials ($1.2 billion) in 2013 to 1,000 trillion ($8.77 billion) rials by the previous Iranian yearend, up about 47% annually, Financial Tribune reported.

According to the PBO, the total value of government bonds reached 551 trillion rials in the previous fiscal year. In the same year, the total finances secured by the capital market reached 829 trillion rials (again minus financial entities) which the reports says was double the amount forecast in the sixth plan (488 trillion).

Along with the banking system, the capital market functions mainly as a financing channel that directs savings toward investment in production and public/ private sectors.

It also functions as a hedge for risks of fluctuation in prices, provides investment opportunities to a wide range of people (retail investors), which in turn allow for balanced distribution of wealth, help create jobs by pumping money into productive sectors, increases competitiveness and promotes economic transparency.

Over the period, the number of shareholders that hovered around 6.5 million in March 2013, doubled to over 12 million by March 2018 -- average 13% annual growth.

Market Value

Additionally, the total value of the market rose from 2,000 trillion rials in March 2013 to 7,500 trillion rials in March 2018, up 25% p.a.

Market value covers the total value of Sukuk bonds, the daily value of investment bonds and the value of derivative bonds.

The sixth plan is a medium-term roadmap of the government and Majlis to help achieve sustainable growth. It says that in order to improve the financial system in the capital, money, and insurance markets, the government can issue inflation-protected securities for reimbursing its debts.

Additionally, as per the plan pertaining to the capital market, the government is obliged to divest a portion of public companies to the private sector during the plan implementation period to decrease its volume by minimum 15%, which the PBO says will help the capital market flourish.

However, PBO calls for increasing the share of financing by private companies.

The report attributes improvement in the performance of the capital market in recent years partly to membership in international taskforces and commissions and major international financial and monetary organizations as well as to boosting supervisory and regulatory leverages.

Potential Risks

However, it also points to the potential risks ahead. The major risks such as disruption in macroeconomic variables, regional conflicts and negativism towards Iran may spook potential foreign investors and international financial service providers.

To curb the negative propaganda against Iran’s capital market, the report suggests improving information instruments to communicate the ability and potential of the market to foreign investors and collaboration with the relevant international media and networks such as Bloomberg.

PBO believes that the capital market should interact conspicuously in the international arena with the help of conferences and seminars.

Additionally, the regulators and decision-makers are advised to set long-term macroeconomic objectives to be able to restore stability to the capital market and by extension facilitate the decision-making tasks of investors.

Another factor that could pose a threat to the capital market is the scarcity of resources allocated to boost this market. In this regard, the PBO points to the 1% share of the capital market from National Development Fund of Iran – money that should be allocated as per the Law for Removing Obstacles to Competitive Production and Promoting the Financial Order to curb heavy fluctuations in the stock market due to political upheavals.

The PBO reckons limited capacity of the stock market to trade the increasing volume of securities, government prices for petrochemicals, and the multi-layer ownership of the some listed companies as other challenges of the capital market.

It adds that companies that import at least part of their raw materials are more likely to be influenced by the volatility in the currency market.