Capital Market Stumbles

Eghtesadonline: The financing capacity of Iran’s capital market abated in the first quarter (March 21-June 21) of the current fiscal year while that of banks increased.

News ID: ۷۸۶۷۲۷

26 July 2021

Funds made available by the capital market was 796 trillion rials ($3.3 billion) in Q1 – down 23.8% compared to the 1,045 trillion rials ($4.3b) reported in the first quarter of last year.

According to data released by the Tehran Chamber of Commerce, Industries, Mines and Agriculture (TCCIM), total contribution of the  money market and capital market was 5,770 trillion rials ($24b) in Q1.

While banks’ role in funding businesses diminished in the corresponding quarter last year due to exponential growth in the stock market, data suggest increasing reliance on banks in the same quarter this year.

Lenders secured 4,977 trillion rials ($20.7b) accounting for 86% of the total loans compared to 73% in the same period last year.

Data published by the Central Bank of Iran indicate that bank loans increased by 2071.7 trillion rials ($8.42b) or 71.3% compared to the same period last year.

Equity financing and debt financing are two options available to businesses in the local capital market. Data released by the Securities and Exchange Organization (SEO) said equity financing declined sharply in Q1 while debt financing rose.

Accordingly, equity financing fell from 851 trillion rials ($3.5b) in the first three months of the last fiscal year to 284 trillion rials ($2.1b) in the corresponding period this year, down 66%.

Debt financing reached 275 trillion rials ($1.1b) to post 30% growth compared to 194 trillion rials ($808 million) in the quarter of the previous fiscal year.

Equity financing is the method of raising capital by selling company stocks while via debt financing firms raise money by selling debt instruments to individuals and institutional investors.

Equity financing has no repayment obligation and provides extra working capital that can be used to grow a business. Debt financing on the other hand does not require giving up a portion of ownership.

As for the main segments of finance, capital raise of listed companies contributed to 64% of the total followed by bonds at 34% and funding via initial public was 2%.

Total funds procured via IPOs reached 13 trillion rials ($54m) in Q1, down 88% from 110 trillion rials ($460m) in the corresponding period last year.

Likewise, capital procurement declined from 900 trillion ($3.7b) in the first quarter of last year to 510 trillion rials ($2.2b) in the same period this year, dropping 43%.

In the reviewed period, the government sold treasury bills worth 200 trillion rials ($833m). It also generated 27 trillion rials ($112m) from the weekly bond auctions.

Apart from bonds sold to fund government spending, companies sold corporate bonds worth 41 trillion rials ($170m) in the period, rising threefold compared to the same period last year.

The diminishing role of the capital market in funding businesses reflects a steep downturn in the market and a huge capital outflow after the share market collapsed in August 2020.

The stock market bubble burst last summer after posting historic gains in a relatively short period.  The benchmark of Tehran Stock Exchange, TEDPIX, jumped 300% in less than five months before diving deep into the red.

Trade data of the past few weeks suggest the Tehran bourse is recovering slowly from the prolonged recession, but the gains are comparably lower. In the month ending July 21, the TEDPIX gained close to 12% while in the same period last year it posted a staggering 46% preceded by a 32% hike a month before.

The outgoing government of President Hassan Rouhani said earlier that it is determined to revive the share market. In May, the SEO announced a package of 10 measures to help shore up the market dominated in large part by sellers.

Assorted government measures are seen as a serious move to try and restore the failing health of the stock market approved by the High Council of Economic Coordination, the top economic decision-making body, comprising the heads of the three branches of power.