It says the government will go for a contractionary fiscal policy next year as it reduces borrowing from banks and the sovereign wealth fund, which should help decelerate the massive liquidity and tame inflation.
TSE says the government has estimated earnings from selling its financial assets at 510 trillion rials ($4.6 billion) – down 19.1% compared to the budget in the current fiscal that ends in March 2019.
The descending order is attributed mainly to the 86% drop in government borrowing overseas, 4.8% drop in earnings from reimbursement of loans, 46.67% drop from divesting public companies to the private sector and cuts in borrowing from the National Development Fund of Iran, according to Financial Tribune.
On the effect of this decline on the capital market, TSE claims the reduced government borrowing from banks and NDFI must curb liquidity growth and by extension reduce inflation and strengthen the rial.
Capital market analysts say all these factors lumped together will help stabilize macroeconomic variables and gradually improve the performance of the stock market as it attracts more money (liquidity) and channels it into manufactures and productive sectors of the economy.
Earnings from selling Islamic bonds is forecast to increase 14.29% over the current fiscal and this bodes well for expanding the debt market next year.
Also, earnings from treasury bills is expected to rise 36.84% and other bonds by 3.6% in the new budget bill estimated respectively at 130 trillion rials ($1.1 billion) and 290 trillion rials ($2.6 billion), which the report says indicates diversity of financial instruments in the capital market.
In Note 5 of the budget bill the government and Oil Ministry are allowed to respectively issue 50 trillion rials ($458 million) and $3 billion in bonds, which shows increase in the value of Islamic bonds compared to years past.
Also, issuing Ijarah Sukuk up to 20 trillion rials ($183 million) in the next budget bill indicates growth of this financial instrument in the debt market.
Also, as treasury bills are not traded in the secondary market, issuing 20 trillion rials worth of bills seen in the budget bill will not directly affect the capital market.
However, the report is cognizant of the indirect effect of bonds in that it is used to barter government debt with contractors’ that eventually help the latter.
Privatization
The report takes a rather dim view of the government plan to continue its privatization drive next year.
According to the report, government earnings from divesting public companies is predicted to decline by 46.67% compared to figures estimated in the current budget.
The lower earnings from privatization and an overall 39.3% expansion in next year’s proposed budget plus other factors show the government is indeed getting bulkier and its bigger share in the economy than private sector, which most observers say in the long-term and midterm will be detrimental for macroeconomic variables and have a negative impact on the capital market.
Government investment in industrial machineries and equipment increased slightly by 2.86% over the current year’s budget. This, the TSE says, hardly shows prosperity of businesses making and supplying the machineries.
The report adds that the subtle 0.03% increase in development projects, compared with the current budget, plus double-digit inflation predicted for next year, could negatively affect the capital market as this would undermine the key construction sector.
Oil Revenues
Oil export revenue is predicted to increase 41% over the outgoing year and accounts for 30% of the total 2019-20 budget.
According to the TSE report, the increase is not attributed to increase in the volume of export, rather is mainly due to the 48% rise in the official dollar rate forecast for the coming year (USD1 = 570,000 rials).
Given that crucial role of oil export revenue in the economy, the increased earnings should underpin GDP in the short-term, which the TSE claims would positively affect capital markets and improve performance of the oil companies and refineries.
Forex Rates
The report says stability in forex rates would boost public confidence in CBI’s currency policies and the concomitant investment security and production growth, which will be auspicious for the capital market.
The report, however, points that given the forecast inflation rate (15%) in the coming year, for most market analysts increase in forex rates is not improbable. Also, forex rate increase would produce mixed results for export-based and import-based companies.
If forex rates rise, better times are forecast for exporting companies such as oil products, minerals and metals companies.
For firms relying on imports, such as auto companies, whose survival is contingent on importing intermediate goods and raw materials, they will encounter higher production costs and, by extension, decrease in earnings.