On Sunday, April 25, President Hassan Rouhani hosted the head of Tehran Stock Exchange at the government's Economic Coordination Headquarters. The purpose of the meeting was to receive a report on the current, unfavorable situation and float ideas for the stock exchange’s recovery. During the discussion, the Iranian president reiterated what he said was "the government's principled and consistent policy” of “support for the capital market".
These repeated proclamations, however, mean little to protesting investors and shareholders up and down the country, who are still waiting for a practical solution – not just words – to address the crisis engulfing the stock market.
For days now, disgruntled Iranian investors – glibly termed “losers” by certain media outlets – have been holding impromptu demonstrations, chanting slogans and demanding the government involve itself to somehow offset the losses of small account holders.
These protests are reminiscent of events that took place in 2017, when account holders with illicit and foundering credit institutions took to the streets to demand their dues. In that case, the government and the Central Bank of Iran eventually relented, offering 20 to 40 trillion tomans’ worth of reimbursement to cool down the mutinous atmosphere.
These investors, however, have different grievances, for whom there will be no one-size-fits-all solution. For one thing, it will be impossible to calculate each individual investor’s potential losses. Adequately compensating them, if appropriate, will also be far more complex than repaying the burnt deposits of the credit institutions’ victims.
So, what are the objections of these people? Why are they targeting politicians rather than market forces? And what might the way out of the crisis be?
Those who have taken to the streets in recent weeks are seeking government support to restore the stock market back to the relatively happier days of 2019 and the first half of 2020, when records were being moved one after the other, and share values rose on paper regardless of the worrying macroeconomic situation.
Economists say that during this period, a steady rise in liquidity, surging inflation, future inflation expectations, price jumps in the foreign exchange market and the blocking of capital inflows into parallel markets were meanwhile feeding the monster that the stock market has become today.
Why is the Government Responsible?
During the days of abnormal market profits, fewer questions were raised about any possible role for the government. The stock market is invariably a risky business and when new, dizzying heights are reached, a fall is sure to follow.
But there are questions to be asked, both of the current situation and the credit institutions’ collapse in 2017. These institutions, and shady outfits offering investment opportunities, have for years been able to operate in any urban alleyway or neighborhood of Iran without obtaining the requisite licenses and permission from the Central Bank. Their activities have now reached critical mass while the authorities have simply looked on.
In a sense, the present crisis goes back to the heavy shadow of the state and state institutions that hangs over every aspect of Iranian public life – most especially the economy. The Iranian market is not self-regulating but assumes government regulation, which has not been effectively managed.
Meanwhile countless senior political figures, from Supreme Leader Ayatollah Ali Khamenei to President Hassan Rouhani, to a constellation of MPs and senior regime officials, have all extolled the virtues of the stock market and encouraged people to invest. These constant speeches and solicitations led countless Iranians to invest their hard-earned cash in a market they believed was well-regulated and without risk, when the opposite was always true.
In April 2020, a ban on trading in Edalat (Justice) Shares was lifted, allowing ordinary people to invest in basket of 49 state-owned companies, including petrochemicals. Originally intended for the lowest-income deciles, their reintroduction led to the number of shareholders surging to close to 50 million.
Farbod Rezania, a senior labor market advisor at the Confederation of Swedish Enterprise, has described the ensuing scrum as “a fraud, plain and simple” at a time when the government desperately needed the extra cash. “Foundations controlled by the ruling mullahs like the Mostazafan Foundation and the Islamic Revolutionary Guards Corps are the major players in Tehran’s Stock Exchange,” he wrote. “They knocked the bottom out of companies they owned and then deceived unsuspecting people to buy their worthless shares.”
The stock market was flooded practically overnight by novice investors characterized by extreme behavior. The resultant hike and collapse of the stock market has been hard for even the most seasoned of traders and economists to analyze.
A Market Unleashed
The most important criticism that now-disgruntled investors have levelled at the state is its exploitation of the market. They believe that in the golden days of the stock market, the government itself could sell shares in state-owned companies, obtain the resources it needed and then leave the market to its own devices.
This no longer appears to be the case. Minister of Finance Farhad Dejpasand previously said of the 2020-21 financial year: "This year, 500 trillion tomans of financial resources were provided through the capital market."
But later, he added: "I must frankly state that some people wrongly thought the government had sourced 500 trillion tomans from the capital market, which was never true. This financial provision to help the country's economy was provided through the debt market and the stock market for all public, private and public sectors, such as municipalities."
The actual amount of government financial provision from the stock exchange, he went on to say, was 30 trillion tomans. This was met with disbelief on the part of Iranian stock exchange experts.
Last week, Dejpasand used an open session of parliament to again address the state of the Iranian stock exchange. He claimed that in 2020, about 127 trillion tomans’ worth of government shares and assets had been traded, of which up to 35 trillion tomans had been directly deposited in the treasury. Of this, about 32 trillion were the outcome of sales in the form of tradable funds or exchange-traded funds (ETFs).
A further two trillion tomans were obtained from instalments and 14.5 trillion tomans from actual shares. But instead of being deposited in the treasury, these resources, Dejpasand said, were transferred to the Targeted Subsidies Organization, which covers social welfare payments, and the Coronavirus Headquarters.
All in all, then, the total amount recouped for the public coffers from trading in government shares in 2020-21 amounted to about 50 trillion tomans. The Minister of Economy then also mentioned “barter exchanges”, without mentioning a specific type or figure, that he said had helped reach a total of 127 trillion tomans.
Taken all together, the existing policies of selling government bonds, government interventions in the pricing of listed companies' products and indexes, and instructions and directives issued to banks and ordinary people invest in the market mean these “loser” investors’ expectations that the state will also resolve the situation no longer seem quite so irrational.
What Support do the “Losers” Want?
The demands of those who invested in the stock exchange and were left catastrophically out of pocket vary from person to person. Recently, some 100 capital market managers and experts sent a letter to the heads of Iran’s executive, judiciary and legislature with eight proposals on how to alleviate the disaster.
The main thrust of their suggested solution was strengthening market demand in the short term. They asked, for instance, for deferral of tax payments on the values of transactions, as a possible incentive and so that these resources can instead be invested in a “Capital Market Stabilization Fund”.
They also suggested that any fines levied by the Iranian government committees tasked with oversight and regulation of the stock market, as well as from financial crimes, be transferred into the same fund. According to reports, these same ideas – using the tools and internal mechanisms of the market to essentially offset state mismanagement – were discussed at Sunday’s meeting.
Another proposal put forward by the group was to allocate one percent of Iran’s National Development Fund to the Capital Market Stabilization Fund. Mohammad Reza Pourabrahimi, the head of the parliament’s economic committee, has asserted that of some 14 trillion tomans due to be injected into the stock market, only one trillion has so far been transferred. The delay in fully implementing this proposal is likely due to resistance on the part of the government’s own economists, including those at the Central Bank.
Yet another of the eight proposals was to amend Iran’s pre-existing commercial laws, which would have little effect in the short term. The group also suggested the head of the stock exchange have a role in the cabinet – which seems curious even if it is legally possible, because it supposes that the Minister of Economy is not currently taking the stock exchange into account when making decisions.
Despite their wide-ranging nature, the proposals put forward in the letter did not address some of the most seismic recent events in the Tehran stock exchange. These have included market lock-ups and a drastic reduction in liquidity, the effects of which have made it difficult for smaller investors to know what to do.
With these restrictions in place, even the flow of investment from the sale of worthless stocks has stopped. This in turn has been to the detriment of genuinely valuable stocks, and to the stock market on the whole.
Efforts to restore the lost trust will require comprehensive planning by Iran’s political and economic authorities. But the two ongoing, major uncertainties of the JCPOA talks and the June presidential election have taken away any opportunity to focus on rebuilding that trust. At the same time, shareholders are more worried than ever about being locked into the market in perpetuity, watching their capital crumble, without any means to get out of the swamp.