During the past decades Iran’s oil revenues have been among the most important factors that affected the expansion of the country’s gross domestic product and it is predicted that such impact will continue. Therefore, the ongoing trend in oil prices around 30 Dollars can be a sign that government’s revenues for the coming year will be limited and on a declining path.
As a result, financial resources for various imports will become more limited and therefore the government will impose additional supervision and limitations over imports.
This is while there are also some predictions about an increase in the price of oil to around 40 to 47 Dollars at the end of the current year or the beginning of the 2017. But even if such an increase occurs, it will be greatly different from the price of 100 Dollars, and there will still be necessary for the government to impose such controls over imports throughout 2016 until March 2017. Therefore, it will be imperative to focus on increasing the domestic production and using vacant capacities in the production sector in order to attain a desired growth in the country’s gross domestic products within the current year.
Road Map to Growth
In this path, although it will not be plausible to attain higher quality in domestic products within a one year term, but it can become a basis for concentrating on the non-oil production and exportation as well as improvement in technological conditions, and to form an interaction foundation for attracting foreign investors and shaping strategic economical and industrial unities. In this regard, it is evident that such comprehensive technological developments and improvements will not be possible in every industry in the country and a selection should take place among industries.
For instance, industries like automobile parts, food and beverages, pharmaceuticals and health and medical treatments, infrastructural undertaking (contracting), etc can be among those selected. In this regard, a revival in domestic and foreign investments is of utmost importance and puts more value on growth in investment projects for the companies from the point of view of the capital market. The presence of foreign delegates eager to invest in the country and a decline in systematic risk in the environment for the country are among elements that can influence a recovery in investments and the capital market.
Positive effects of reduced inflation
Inflation rate is another macroeconomic indicator that is not only effective on economic growth conditions but also on the situations in the capital market. A quick review of changes in the country’s inflation since the beginning of this year reveals that the inflation rate has been less than 6 percent since the beginning of the year until the end of the month of January and the point-to-point inflation rate has also reached levels below 10 percent. Data from the Central Bank of the Islamic Republic of Iran show that not only the inflation rate has been negative during months of July and August of this year, but also it is predicted that they will become single digit for the coming year.
This will on one hand affect the profitability of companies, and on the other hand due to a decrease in the profit margin of industries, companies will concentrate on growing their production and sales in order to compensate for the drop in their profit margin through inflation.
Relationship between the rate of profit and the prospering stock market
Interest rate is another indicator that has a decisive role on the amount of incoming and outgoing financial sources to the capital market. The significant gap between inflation rate and banks’ interest rate, decrease in the inter-bank rate from around 28 percent to the average of 18 percent at the end of this year’s winter and the expected decline in the banks’ interest rate for the coming year albeit small, are among factors that can affect the trend in the capital market. The reason behind such impact is the rough path towards decreasing interest rates due to the government’s debt to the country’s banking system and also heavy balance sheets of the banks. On the other hand, the decrease in deposit rates depicts a more promising prospect for the coming year with reduced effective interest rates for facilities in the country’s banking system as well as the possibility to provide financing resources with more suitable rates through money and capital markets.
Based on the above description of the economic trend in the country, we can sum up as follows: Within the next year the inflation rate will become single digit, banks interest rate will decrease, inflationary profit making will decline sharply, rate of financing for working capital and development projects of business through banks and the country’s capital market will diminish, and the elimination of sanctions and the implementation of the “Comprehensive Plan of Action” and the establishment of a reciprocal trust and increased mutual collaboration with international investors will all make the foundation for growth in investments as well as formation of mutual and industrial unities within the next year.
Attention to the world economy parallel to analyzing the domestic economy is of great importance. In general by analyzing the global economic situation and its future trend as well as its effects on the Iranian economy we can note that throughout the world total demand has been reduced significantly due to various factors including the reduced oil prices, and diminished prices of petrochemical products and minerals. Unstable situation in the global economy and markets has led to the existence of excessive financial sources, which in turn increases Iran’s possibility and potential to attract foreign investments as a country with conditions of an emerging economy.
The abundance of low-priced (cheap) financial resources throughout the world can provide the country with the opportunity to attract financing resources with very attractive rates, conditioned to providing necessary guarantees by international standards.
Considering the existing trend in global economy and international markets, it is anticipated that the Iranian economy will witness at least one year of reduced profitability in industries such as petroleum and refining, petrochemicals, as well as metals and minerals. However, concentrating on industries with high growth potential instead of a traditional focus on production and sales of raw material can lead to continuous development trend in the country for the coming years especially next year and can pave the way for the revival of the Iran’s economy and improvement in its capital market.
Based on what was depicted in the previous section, the capital market will be affected beneficially in three ways within next year: reduction in banks interest rate, increased profitability for companies, and future investment prospect in physical assets as well as national assets of the country.
It is apparent that reduction in banks interest rate will result in the transfer of money from accounts and non-risky investments towards the capital market. Any growth in the profitability of those companies that are accepted in the capital market will come from an increase in production capacity and optimization of production efficiency as well as reform in technology in selected industries, and not from an inflationary increase in prices. Most important of all, an increased presence of foreign investors can lead to a deep transformation in the capital market trend for the year ahead.
However, in order for the above mentioned conclusion to be realized the focus should turn to requirements that are inevitable for a continuous market growth in the coming year and the years after; These necessities include increased size of the capital market regarding the number of companies, rise in the amount of fluid and tradable shares, and design and creation of modern financial instruments for the development of capital markets in order to establish the capacity to attract domestic and most importantly foreign investments to the capital market.