Close to $295 million-worth of Islamic Treasury Bills—a version of short-term sovereign debts—was scheduled to go public via Iran Fara Bourse to stimulate fundraising and test investors’ risk appetite for Iranian sovereign debts.
380,000 T-bills with 29.30 cents face value were sold at almost 10% discount to both institutional and retail investors through IFB on September 30.
The bills will yield 24.3% per annum—considerably higher than the 20% cap set by the central bank on one-year deposits—given the 165 days left to their maturity on 13 March, 2016, which is right before the end of the current fiscal year, according to Pouya JabalAmeli, a Central Bank of Iran analyst.
The price match has been kicked off and the government is geared to sell an additional 9.6 million T-bills in the coming weeks to raise money in lieu of paying contractors via equity market.
Tumbling oil price dramatically slashed government’s earnings, which already led to budget deficit. Furthermore, lingering sanctions on Iran’s nuclear program and global commodity slump exacerbated liquidity issue in the country.
A slowdown in emerging markets driven by weak commodity prices forced the International Monetary Fund to cut its outlook for global growth this year to 3.1% from a July forecast of 3.3%. Due to large contribution of petrochemicals, minerals and metals sectors to the economy and commodity glut; many companies are feeling the pinch amid the sentiment. The gloomy outlook of commodities market is not expected to ease the burden of hardships on economy in the short run.
High-risk free interest rates of Iranian banks have swallowed the liquidity. Despite the fact that the administration’s policy was to garner liquidity in a bid to tame stubborn inflation, it has also helped draining the equity market with many companies currently grappling with credit crunch.
It should be noted that domestic banks are not flush with money anymore. As they are wrestling with high level of nonperforming loans, raising money through banks very has got more expensive. Hence, debt market could be the best strategy to fundraising. Iranian Vice President EshaqJahangiri announced in April that overdue debts had reached an unprecedented amount of $30 billion, calling it a major obstacle to proper banking practices.
The economy is not yet integrated to global economy and foreign fresh inflows are less likely to find way to industries before 2016. Thus, to ease the burden on budget and stimulate the cash-strapped economy, risk-free Islamic bonds with a yield more than banking interest rates can lure investors and help the economy get back on track.
Adding to Murabaha, Musharakah and Ijarah—three prevailing types of Sukuk with various maturities—T-bills with short maturities that went public through IFB could draw risk-averse investors’ attentioneither in Iran or across the world, according to Amir Hamooni, CEO of IFB.
“Once sanctions are lifted by the early 2016, dollar or euro-denominated sukuk will be issued for an array of investors piled up to tap into Iran’s lucrative market.”
Treasury and the government guaranteed T-bills and they will be settled at the maturity, Deputy Economy Minister Shapour Mohammadi said. He also noted that the government is planned to continue issuing Islamic bonds, including T-bills as a prudent economic policy aimed at boosting the economy.
“Banks could benefit from the debt market as a form of collateral, if the central bank gives its approval,” Mohammadi said. “We intend to introduce a law in 2016-17 to enable executive enterprises to accept these securities as credit or trade them at the bourse,”
As an industrialized economy, almost all sectors are well collateralized, which can considerably guarantee the yield. Petrochemicals, mining, FMCG and pharmaceutical by far are the most attractive sectors to savvy institutional investors. Low government debt to GDP, abundance of natural resources—fourth biggest oil reserves in the world—, more than $100 billion of Iranian assets that are estimated to be unfrozen as well as human capital make the country an spectacular untapped market on earth.
Iran recorded a government debt to GDP of 10.63% of the country’s Gross Domestic Product in 2013. Government debt to GDP in Iran averaged 14.39% from 1996 until 2013, reaching an all time high of 24.14% in 2002 and a record low of 9.19% in 2011. The CBI reports government debt to GDP in Iran.
Foreign currencies denominated bonds are an inexpensive method of fundraising through international lenders. Many delegations already visited the country and gauged potential sectors. Yields may differ case by case. Though, they would be attractive for international fund managers.