Source: Iran Investment Monthly, Turquoise Partners

ECONOMY

Inflation:

The inflation rate for the 12 months to August stood at around 15.4%. Although this figure has dropped in comparison to the previous month, it is 3% higher than the inflation rate recorded for the previous Iranian calendar year (which ended on 20 March).  The main reasons behind the rise in the inflation rate since the start of the year are:  

1.                   the government’s budget deficit,

2.                   excessive withdrawals from the country’s Oil Stabilization Fund,

3.                   excessive obligatory loans provided by the banks and

4.                   the interest rate cut that was imposed on the state-owned as well as the privately-owned banks by the government.

Foreign Investment:

According to statistics provided by the Foreign Investment Organization in Iran, projects valued at around $9 billion have received a foreign investment license from the government in the first five months of this (Iranian) year,   However, a proportion of the approved projects will be abandoned before any investment is made. According to the official figures, only around 60% of the licensed projects will reach implementation phase. This is one reason why the Foreign Direct Investment statistics provided by the Iranian government and those provided by international organizations may vary significantly.

Interest Free Bank:

The High Council of Economy, presided over by President Ahmadinejad, has approved the establishment of an Interest Free (Qarz-al-Hassaneh) Bank in Iran with a starting capital of $2.2 billion. This bank will have branches all over the country and will benefit from the participation of a number of state-owned and privately-owned banks.  It will accumulate interest-free deposits in order to then provide the needy with interest-free loans for marriage, entrepreneurship projects, health care, and education. The only cost of the loans will be a set fee that is paid to cover the cost of the operation. The creation of the bank is designed to stop the current practice of commercial banks accumulating interest-free deposits while lending at high interest rates.

Changing Currency:

There are discussions in Iran regarding the possibility of clearing three zeros from the country’s bank notes. Currently the largest bank note in Iran is only worth $5.35. The lack of larger bank notes together with over thirty years of inflation depreciating the value of the Rial, has resulted in a large number of bank notes in circulation.  The printing costs of the Central Bank are consequently high and the durability of these notes is much lower in Iran than compared to global standards.

Trade Partners:

China has taken Germany’s place as Iran’s top trade partner in 2006. During the last decade, Germany has consistently been Iran’s largest trade partner.  Iran’s trade with China stood at $15 billion in 2006 which was three times larger than the trade figures with Germany. Within the European Union, Italy has become Iran’s number one trade partner with Germany now second and France third.

Top Creditors:

French banks top the list of European lenders to Iran, with debts of around $5.8 billion.  The German and the Belgian banks are next with $3.1 billion and $1.6 billion respectively.  Overall, Iran owes European banks a total of around $15 billion.

MARKET

Continuing with its growing trend in the recent weeks, the indicators of the Tehran Stock Exchange demonstrated strong performance during the month of August.  One of the main reasons behind this continuous positive performance is the relative calm in the political environment surrounding the Iranian nuclear issue. The market had an overall performance of 6.7% during the month of August with the total value of trade and number of traders also increasing by four and nine percents respectively compared to the previous month. The performances of some of the main sectors of the market are analyzed below:

Recently Privatized Companies

One of the other drivers of the recent growth in the market has been the recent privatization program and the impact of the privatized companies on the market as a whole. During the month of August for example, out of the $450 million total volume of trade in the market, $135 million (30%) was due to trading in Mobarakeh Steel Complex and National Iranian Copper Industries Company (NICIC) was responsible for another $72 million (16%).  This means that trading in only two of the recently privatized companies, which happened to become the two largest listed companies, have accounted for almost half of all trades on the TSE during this month.  As a result, even though most sectors have performed positively during this month, it is fair to say that the growth in the market is still very much dependent on the few recently privatized companies. 

In addition, shares of another steel company, Khuzestan Steel Company, were offered to the market by the government for the first time making it the fourth privatized company under the recent privatization scheme.  On 16 August, 5% of the shares of the steel company were sold on the market in less than 2 minutes time.  This share block was sold for a total value of around $39 million, giving the company a total valuation of over $780 million.  Khuzestan Steel Company is located in the Khuzestan province in Southwest Iran and produces around 2.4 million tons of steel ingots.  Around 75% of the company’s products are consumed domestically while the other 25% are exported mostly to the regional countries such as Saudi Arabia and Kuwait.

Petrochemical

There was a huge demand for the shares of the four listed petrochemical companies during August. The shares of these companies witnessed a heavy buying queue. However, due to the restriction on price change which is also linked with a minimum volume of trade in order to observe any price change, the buying queue kept growing in size without a significant change in price of the shares.

Real Estate and Construction

August was a quiet month for the companies in this sector. The sector’s index grew by 1.1% during this month.  Most of the listed companies in this sector have their fiscal year ending in mid-September. As a result, the trading in this sector is expected to get more heated in the coming months before their Annual General Meetings (AGM) is held.

Iron Ore

The global price of Iron Ore has reached over $100 per ton during August which is a record high for this commodity. In Iran, even after the recent approved price rise, Iron Ore is sold to steel manufacturing companies with a price of around $50 per ton which is half of international prices.  Iron ore mining is therefore considered a sector with good potential to grow once the current restriction on export is lifted.  Out of the two listed companies in this sector, Chadormaloo and Golgohar, the latter has a better competitive advantage for export due to its access to railway and its closer proximity to international waters. Chadormaloo currently sells all its products in Iran while Golgohar has received a government approval to export almost half of its products.

Leasing

The government has once again postponed the decision on the interest rate that the leasing companies can charge. As a result, the leasing companies continue to lease at the previous rate of 17%.  This is relatively good news for this sector given that the government was discussing a plan to cut their interest rates to 13%.  The index of this sector performed well during August and grew by around 4.2%.  Experts believe that considering the interest rate cut imposed on the state-owned and privately-owned banks a few months ago, and also the lack of financing options from abroad, the continuation of work of the leasing companies will be uneconomical if the government decides to cut the leasing rates in the future.

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Overall the market performance was positive during August and the TSE experienced its second month with a performance of over 6% during this year.  In July the market grew by 6.2% while its growth continued in August with a return of 6.7%.  If the relative calm in the political scene continues, it is expected that the positive performance of the market continues in the coming months given that shares of many more companies are expected to be offered to the market through the privatization scheme.

The following graph demonstrates the performance of the TSE Price Index and the TSE Price and Dividend Index during the month of August.

About Turquoise: Turquoise is a boutique investment bank based in Iran with offices in Tehran and London. Turquoise publishes Iran Investment Monthly with the aim of keeping its recipients updated on the latest macroeconomic developments in Iran, providing an in-depth analysis of the Tehran Stock Exchange as well as introducing new financial products and private equity opportunities to potential investors. For more information please visit: www.turquoisepartners.com/iraninvestment