Iran’s stock market is on a historic run as prices increased 190 percent in the twelve months ending March 20 and keep rising, outpacing any other investment opportunity in the country.
While the economy has been in crisis for more than two years, the national currency has devalued more than fourfold and U.S. sanctions have brought its oil exports to just 10 percent of 2017, how could the stock market skyrocket?
Based on economic indices, with Gross Domestic Production down by nearly nine percent, the situation certainly resembles a stock bubble that no one knows when it will burst, but when it does, many Iranians will lose their capital one more time.
In the past decade or so many ordinary people lost their savings when banks and unlicensed financial institutions went bust, leaving the government with angry protesters and a lot of financial liabilities.
The banking debacle was seen as the result of lax supervision of businesses owned or protected by powerful regime insiders, who often pocketed huge profits and remained unaccountable. Some people were prosecuted, but the real players remained at large.
The rise in Tehran’s stock market revolves around 650 companies engaged in petrochemicals, steel production, oil refineries and suppliers of raw materials.
Most of these companies are government-owned or quasi-governmental, with dubious records, not much profits and often losing money. Currently, most of these sectors are crippled by U.S. sanctions, having lost export opportunities. So why do investors put their money into their stocks?
One answer is lack of investment opportunities in real businesses because of a deep recession. For example, one favorite sector is construction that is currently in recession. The government has also reduced interest rates from above 20 percent to around six percent. With an unstable currency, six percent profit is not a good investment, because one can lose a lot of his capital in a matter of days if the currency takes another tumble.
Therefore, the rising stock market is seen as a shield against devaluation of money, but on the longer run it can be a very risky proposition.
Another reason for the bull market is the government’s decision to offer 20-30 percent discounts for stocks of state-owned companies. Shares of big banks and insurance companies have been offered to investors with 30 percent discount.
But even these big, government enterprises are not necessarily profitable. When Iran had oil income, the government compensated for the losses of its key banks but now it cannot afford it any longer and has decided to dump their shares on investors.
President Hassan Rouhani’s government is basically broke. With around $40 billion in lost oil exports, perhaps more than half of its operating budget is gone.
Now it needs to rid itself of loss-making companies and collect money from the public who buy the shares to replenish its coffers.
There are estimates that citizens are holding $20-30 billion in hard currency. This is a golden opportunity for the government to sweep up as much money as it can from the public. There are also suspicions that the state first boosted the stock market last year with a plan to lure in investors and then cut the interest rates at a good moment this year to fuel the stock market run.
Stock market bubbles inevitably burst sooner or later under market pressures and cause widespread damage. But even before they do so, they cost society and the real economy money. Instead of capital boosting production, it is wasted in speculation that at the end brings profit to a few and causes sorrow to many.
The Iranian government’s ability to keep fueling the stock market is limited and it won’t be able to indefinitely offer discounted shares of big companies. Willing buyers will also run out of money to invest in the stock market. Once the bubble bursts it will be another shot at the heart of the Islamic Republic’s economy.