New Measures to Help Lift Share Market

EghtesadOnline: To help rescue the crisis-plagued stock market, the government has announced new measures to boost demand and improve profit-taking.

News ID: ۷۸۷۴۷۱

21 December 2021

The Economic Coordination Headquarter approved ten measures announced by the Economy Minister Ehsan Khandouzi late on Sunday, IRNA reported.

The measures seemingly address the valid concerns of stock investors about the price of feedstock the government sells to the giant metal, refinery and petrochemical companies.

Accordingly, feedstock prices for petrochemical companies is similar to the export price of Iranian natural gas and set at maximum 50,000 rials per cubic meter.

Feedstock for steel and refinery companies would be 40% of the rate set for petrochems and at maximum 20,000 rials per cubic meter. For cement markers it is 10% of that charged for petrochemicals.

In recent weeks the stock market saw more setbacks partly due to concerns over anticipated higher feedstock prices the government wants to charge major steel mills as envisioned in the fiscal 2022-22 draft budget.

Concerns were driven by the fact that a steep rise in gas sold to steel plants would undermine their profit margins and subsequently impact steel prices in the share market.

The government initially set the same feedstock price to steelmakers and petrochems. The price in the present budget is 30% of what petrochemical companies pay.

Earlier estimates indicated that higher gas prices, if approved, for steel mills would cut their profits by 240 trillion rials ($800 million) next year.

Rise in Parity Rates

As per another decision, forex parity rates are to be increased substantially apparently to improve the financial health of 18 banks listed in the stock market.

The rate will increase by up to 90% of the currency rates quoted in the secondary foreign exchange market known as Nima, an online platform where exporters sell their overseas currency income and companies buy for import.

With the dollar at Nima now worth 242,000 rials, the parity  rate would jump to 217,000 rials (or equivalent in other currencies) next year, albeit if Nima rates don’t rise.

This amount is almost double the present parity rates. Parity rates are used by lenders as the basis for their financial statements.  It also is a tool for lenders to prepare or revise their financial statements.

Low currency rates will particularly impact the performance of listed banks because their forex assets are normally undervalued in their financial reports.

In addition, the Central Bank of Iran is obliged to “actively intervene” in the interbank market and navigate average interbank rates at maximum 20%. The present rate is 21.4%.

Higher interbank rates make investors nervous in various asset markets. Particularly, the share market has proven to be more sensitive to interbank rates while financial experts see a positive correlation between share prices and interbank rates. As such, lower rates make investment in shares attractive while higher rates have the opposite effect.

It needs mention that selling government bonds is contingent on the amount of liquidity in the stock market. In other words, total bond sale in one month should not be more than 50% of the liquidity inflow in that month.

In recent months investors have expressed concern over the huge bond offers by the government, saying that it has drained liquidity in the bourse as banks and giant investment funds are coerced to sell shares and buy bonds.

Other Measures

The latest support package includes measures that improve liquidity of shares. In one decision, 10% of the funds raised via the initial public offering a newly listed state company must be used for market making operationss of that company to ensure shares are traded smoothly.

In addition, government income from tax on trading shares will be injected into the Capital Market Stabilization Fund, which is designed to resolve liquidity crunch in the stock market during times of liquidity outflow.

As per the  proposed budget, the government expects to earn 104.2 trillion rials ($360 million) from taxing stock trade next year.

Furthermore, the stabilization fund will raise capital by 300 trillion rials ($1.3 billion) to increase its leverage in balancing share trade.

As yet another decision, the government has no plan to increase mining royalties on mineral companies. A royalty is a fee that is imposed by governments on either the amount of minerals produced at a mine or the revenue or profit generated by the minerals

The government has also cut the tax rate by 5 percentage points levied on manufacturing companies listed with Tehran’s share market.