Iranian commentators have recently referred to a "crisis" on the Tehran Stock Exchange. The slump is particularly evident because the market's key index (Tepix) rose by nearly 80 percent between March 2001 and April 2003, while the indices of exchanges in Frankfurt, London, New York, Paris, and Tokyo tumbled by 40-70 percent. The gains in Iranian securities had continued until recently, too, culminating in a tripling of the key Tehran index in the period from 2001 to May 2005.
The downturn has been attributed to uncertainty over the future based on the nuclear question, as well as to President Mahmud Ahmadinejad's seemingly negative attitude toward the stock market. These factors might disappear or be resolved, but at least one economist has noted that the Iranian stock exchange suffers from deeply entrenched problems. These will be more difficult to resolve.
A Slow Start
The Tehran Stock Exchange began dealing in the shares of a few private banks and companies, as well as treasury bonds and state-backed securities, in 1968. By the 1979 Islamic revolution, 105 firms were listed on the exchange. That number fell to 56 after the revolution, as private banks were nationalized and enterprises belonging to the royal family were expropriated. Islamic regulations against interest payments, Marxist hostility to capitalist institutions, and the 1980-88 Iran-Iraq War all stifled activity on the stock exchange, economist Jahangir Amuzegar writes in "Middle East Economic Survey" in May 2005.
The exchange enjoyed a brief surge from 1994 through 1997 before tapering off. When the annual money supply increased and there was a mild recession in other prospective areas of investment, Amuzegar explains, there was a "meteoric boom." The Privatization Agency's initial public offerings (IPOs) contributed to this. From March 1999 to March 2003, the Tepix catapulted from 2,206 to 11,400, and trading increased from 1.7 billion shares to 7.9 billion shares. The exchange hit a high of 13,836 in December 2004.
Indeed, the market was so heated that in August 2003, the head of the stock exchange forbade any price increases for a two-week period.
New Concerns
In late-September and early October, many observers have expressed concerns over the state of the Iranian market. Hussein Abdeh-Tabrizi, secretary-general of the stock exchange, hinted at a crisis, "Farhang-i Ashti" reported on October 5. Abdeh-Tabrizi said uncertainty over the nuclear issue undermines investor confidence. He also said the government and the exchange are trying to determine how to support the stock market, and he added that offering shares in state enterprises is one way to motivate prospective investors.
Moderation and Progress Party Secretary-General Mohammad Baqer Nobakht argued that problems in the stock market are connected with an unclear economic future, "Aftab-i Yazd" reported on October 5. The government should stop repeating slogans and offer a solution, Nobakht urged.
In the October 2 legislative session, Lahijan representative Iraj Nadimi, rapporteur of the parliamentary Economic Committee, called on the economy minister to explore the political roots of the stock-market slump and take action, "Resalat" reported on October 3. Nadimi said previously that the legislature would look into the causes of the market crisis in the coming fortnight, "Iran" newspaper reported on October 1. "At the present, the Iranian stock market is facing some serious problems, and if the reasons for this situation are not identified and tackled, its consequences will certainly inflict harm on the country's economy," Nadimi said.
The October 1 report in "Iran" newspaper noted that the Tepix had fallen almost 400 points in the previous two weeks. The paper added that the head of the exchange, deputy Finance and Economic Affairs Minister Tahmasb Mazaheri, and other officials had met to discuss ways to restore normalcy to the market. Participants in the meeting attributed the situation to "psychological factors" and concern over the nuclear issue. They called for greater attention and sensitivity to the issue by the government, they decided to ask major shareholders to try to prop up purchases, and they considered asking banks to offer incentives to purchasers of stocks.
Seeking A Government Commitment
An editorial in "Sharq" newspaper on 29 September warned that if the current pattern continues, the Tepix will be 26 percent lower than its high point in December 2004. "Sharq" said the trend in the stock exchange can be reversed "only if the new government displays an open and strong commitment to open economy by moving toward privatization, [and] supporting investment." The editorial also recommended eliminating corruption and encouraging investment. The government must prove its interest in "genuine reforms" rather than "repeating the past," the paper argued.
The English-language "Iran News" reported on September 27 that the Iranian stock market was undergoing "one of the most serious crises in its entire existence...[in the form of] a continuous slump ever since last June's presidential election." The newspaper reported that many investors are pulling out. "Iran News" attributed the situation to the reasons described elsewhere: uncertainty, concern over government plans, and the nuclear issue. The daily added that investor confidence was further undermined by Economy Minister Davud Danesh-Jafari's failure to attend a monthly meeting of the exchange's high council.
But the impact of Ahmadinejad's victory was being felt just days after the election, in the face of reports that he had compared the stock market unfavorably with gambling. His representatives and state media said Ahmadinejad actually favors the capital market and wants to expand it. And the president-elect himself said he supported using the stock market to encourage investment.
Deep-Seated Problems
Uncertainty over the nuclear issue persists. Moreover, this question continues to adversely affect Iran's relations with the international community. These factors are likely to continue to have a negative impact on investor confidence and the Tehran Stock Exchange. Ahmadinejad, on the other hand, could implement economic policies that restore people's willingness to invest in the market. This is not a certainty, however, as the president's recent comments indicate that he does not fully embrace the role of an independent exchange. When he discussed economic affairs and the stock market on October 5, Ahmadinejad said market fluctuations can be controlled because 80 percent of the issues belong to state entities, state television reported.
More deeply entrenched factors suggest the stock exchange has a risky future. Amuzegar writes in "Middle East Economic Survey" that the exchange's governance structure makes it a "virtual appendage of the state" -- its top decision-makers are government officials or government appointees. Eighty percent of its market value is owned by state organizations or parastatal institutions, such as the foundations (bonyad). The exchange is small -- of the 680,000 companies registered in the country, only 420 are listed on the exchange. One hundred of those companies are totally inactive, Amuzegar points out, and fewer than 200 are traded regularly.
There is a "perpetual imbalance between demand for shares and their supply," Amuzegar continues, and there is "insufficient liquidity." Furthermore, Western standards of transparency, enforcement, self-regulation, and disclosure are absent. There is no equivalent of a Securities and Exchange Commission that can enforce rules or standards of accountability. On top of that, share prices are susceptible to manipulation by speculators and others with insider information or various forms of influence.
Finally, foreign participation remains "fairly limited." Foreigners are allowed to buy just 10 percent of any listed company, and principal, dividends, and capital gains can only be repatriated after thee years.
