Iran’s Secondary Capital Market on Maturation Path

EghtesadOnline: Since the 12th Iranian government took office in August 2017, issuing debt securities in unregulated markets has been banned and all debt securities must be issued within disciplined, regulated markets for further price discovery and transparency of trades.

News ID: ۷۸۲۹۵۰

18 June 2018

Therefore, secondary markets could conduct functional trades in order to prevent any further misconduct or proxy manipulative trades.

Organizing such a secondary market for Islamic debt securities (sukuk) would prevent the escalation of high unofficial rates on financial instruments that could in turn be a threat to stock market returns as somehow it could negatively correlate with banking time-fix deposit volumes, which could affect liquidity measures in the market.

Shariah-compliant Iranian capital market has witnessed a robust growth accompanied by the gradual surge of secondary market to almost 469 trillion rials (approximately $11.15 billion) worth of sukuk in the last fiscal year. Secondary markets have provided a promising factor for investors to hedge their liquidity risks while providing a significant stimulus for further debt financing trends on large industries, Financial Tribune reported.

The further this asset class (fixed income securities) expands, the more liquidity it would attract through corporate debt participation. This, in turn, would provide a wider range of investment opportunities, also in high quality, Shariah-compliant and investment-grade debt.

Notwithstanding, one can see that currently there is not much depth in the Iranian Islamic debt market. Therefore, top large institutional investment firms must be able to perform and demonstrate efficient operational income, which might open alternative methods for them to do so.

Holding on considerable portions of debt market through consolidated accounts might push the asset class for pricing bubble and could enable the corporates to show marginal profits and substantial gains to match their targets.

Another significant contributor in Iranian Islamic fixed income securities market is the buy side (asset managers). In order to maintain attractive net asset value of their funds, they tend to hold on to their assets as much as possible in spite of transacting them in secondary markets. This issue may bring liquidity measures at minimal level in the aforesaid market and affect secondary markets.

The last two influential forces have severely distressed the Iranian secondary market, as a consequence of a shallow market in sukuk and corporate issuance. Islamic debt issuance directly linked with banking sponsorship and high costs of capital for any corporate issuer may definitely come as a challenge.

Lately, Debt Securities Rating has become the headlines of all capital market ecosystem of Iran as an initiator of debt issuance development. Further issuance will lead to a deeper market and more investment opportunities for market players and robust secondary market with less volatility.

Respectively, establishing and promoting the structure of Shariah-compliant repo markets would allocate a directive in boosting cash flow management, bank reserves management, transmit monetary policies and money supply efficiencies.

Dealers finance their ownership of a security by borrowing money from market and facilitating liquidity in secondary sovereign and corporate debt securities market.

Constructing a deeper and larger market so no syndication or even solo player could impact the macro measures is an inevitable choice for further enhancement of capital market functionality. Market capitalization of Iran’s capital market in ratio with its gross domestic production falls below 30%, which is an indication of the need for more resource allocation enhancement by prioritizing liquidity management conduct.

Attracting foreign investment should be considered a necessary domestic policy by plugging the economic ecosystem with international financial transactions, and not just by absorbing sinking cash as investments.

Over the past 10 years, allocations to emerging and frontier markets debt in global portfolios, and local currency debt in particular, are below average. Thus, investees should see the number of triggers for a pickup in demand.

Realistically, the share of foreign ownership has not risen materially in most markets or has even fallen in large markets as well.

Therefore, it is crucial to take into consideration local investors, who inject stability into debt markets and secondary markets relatively, ranging from pension funds and insurance companies to banks and even asset managers.

In order to facilitate a deep dive for foreign investment, gaining an in-depth understanding of the domestic investors base, which is one of the key elements needed to be able to outperform in that local market, is required.

Indeed, a low share of foreign ownership extends the interest of international institutional investors, but such inflows of capital as “real money” is likely to be subject to a higher than average volatility due to a high degree of concentration, greater uncertainty because less information is available or due to greater sensitivity to changes in market social, political and economic conditions.