“These days will pass and we have experience surviving. After the 1979 revolution there were big changes among managers, so maybe we are set for a similar process.”
The words of a senior banker in Tehran – concern tinged with defiance and optimism – mark the end of a “wait and see” period in which private business and many government officials gave time for the new administration of President Mahmoud Ahmadi-Nejad to settle down.
By early November, bankers were among those concluding they had much to fear over the new president’s commitment to “justice” and redistributing resources.
The adverse market reaction to the government’s apparent lack of direction was clear. The Tehran Stock Exchange (TSE) dropped through the psychologically crucial 10,000 mark, down from around 12,500 in June’s election, Iran was without an oil minister after two presidential nominations fell foul of parliament and private business was stalled in many sectors.
Wholesale substitutions
After the news that 40 of 72 ambassadors were to be changed – including those to the UK, France and Germany – came word the president was replacing seven managing directors of state banks.
The appointments were Abdol-Hamid Ansari at Melli, Zare Eskandari at Tejarat, Hamid Borhani at Saderat, Ali Divandarrei at Mellat, Hasan Kari at the Housing Bank and Ahmad Derakhshandeh at Sepah.
The new agriculture minister also appointed Hasan Nourbakhsh to replace Jalal Rasoulof at Keshavarzi, which was chosen by The Banker as Iranian bank of the year after increasing over 10 years its number of customers from four million to 19.2 million and its share of aggregate banking deposits from 1% to 6.3%.
“Most of the new appointees do not appear as knowledgeable as those they’ve replaced,” says one analyst, preferring to speak anonymously. “Of course, we expected change, but not overnight and not as drastic as this.”
As The Banker went to press, there was no change at the top of the two specialised banks – the Export Development Bank of Iran, and the Industries and Mines Bank – nor at Iran’s central bank, where Ebrahim Sheibani, the 56-year-old governor in post since 2003, heads an experienced team.
Before and during the formation of Mr Ahmadi-Nejad’s government in August, some of his economic advisers played down his populist slogans from June’s election, one of which promised people would see “the oil money on their sofreh [dining cloth]”.
While the new economic team – including Davoud Danesh-Jafari, the minister of economy and finance – is thought to be sympathetic to market reform, Mr Ahmadi-Nejad’s public pronouncements have continued to evoke the economic statism Iran has committed itself to reduce through the 2005-2010 fourth five-year plan.
Veiled threats
Speaking to parliament in November, Mr Ahmadi-Nejad said banking resources should be “distributed fairly around the country”. In October, he repeated earlier comments questioning Parsian, Iran’s largest private sector bank. “Private banks have their own peculiarities,” he said. “One increased its capital to IR2000bn [$222m] from IR150bn within four years.”
The president has made a series of veiled threats about corruption, telling parliament in November he had decided, after advice from “some friends”, not to reveal yet “a long list of cases where the treasury had been exploited by some”.
Mr Ahmadi-Nejad suggested favouritism was rife in banking. “More than 60% of the banking resources should not be distributed to just 3% or 4% of applicants – and even then through middlemen, special connections and other things,” he told parliament. “If certain individuals take IR10bn or IR15bn [toman] loans from the bank just because they are connected to certain centres of power, and when the bank asks them to repay the loan, they bully their way and say they will not pay, the government is not going to tolerate this, it will cut their access to the public purse.”
The president has also focused criticism on the “profit rate”, the Islamic equivalent of interest rates. Although the banking sector lacks resources to meet demand, lending rates have been high, reflecting an inflation rate put officially at 15% but thought to be around 20% by analysts.
In what looked like a pre-emptive move, in July, just after Mr Ahmadi-Nejad’s election win, the Money and Credit Council – headed by the central bank governor – ordered state banks to lend at 16%, with some exceptions. This was a decrease from the previous 21% for trade and services, but the 13.5% for agriculture was held at that level by government subsidy.
Mr Ahmadi-Nejad and some parliamentary deputies have continued to argue that rates should be lower. In mid-November, Keshavarzi dropped its lending rate to 9 %, comfortably below inflation, with Sadeq Khalilian, a deputy agriculture minister, announcing ministry resources would be added to the bank’s to increase the government’s lending capacity to agriculture by five to 10 times.
A centrally directed sharp reduction in the unified lending rate would need a similar lowering of deposit rates to keep banks in the black. But with inflation at 15%-20%, this could wipe out real rates of return and so prompt sharp rises in liquidity and generate asset price inflation and accelerated consumption.
Karafarin, the private bank, noted in a recent survey that in the period up to end-June the rate of growth in deposits was already showing signs of slowing down in response to fears over interest rates.
Power of petroleum
Understandably, the mood in the banking sector is not upbeat. “State ownership or control increased under the government of Mohammad Khatami, although it was committed to privatisation,” said one banker. “The real problem for Iran is oil. When the government controls oil revenue, there is very little you can do against it. Oil is wealth, but it’s being used as income.”
With Iran the second largest producer in the Organisation of Petroleum Exporting Countries (Opec), Mr Ahmadi-Nejad sees room for manoeuvre in oil income – around 80% of export earnings and 60% of government budget – expected to reach at least $45bn in the current Iranian year ending March 2006.
This could put as much as $24bn by year end in the Oil Stabilisation Fund (OSF), set up by the Khatami government to ring-fence all excess oil revenues for private-sector loans and infrastructure investment.
In practice, both government and parliament have long dipped into the OSF. Mr Ahmadi-Nejad has the fund in his sights, promising to divert 30% of surplus oil revenues into a compassion fund to help young people find jobs and a marriage partner.
But diverting oil revenue into current spending is clearly inflationary and would make it impossible to reduce lending rates.
Reality seems slowly to be dawning on some. Masoud Mir-Kazemi, minister of commerce, says the government “will gradually decrease the profit rate” over the upcoming years, commensurate with the inflation rate. And parliament withdrew the “urgency” on one of its strategic plans, drawn up under the Khatami government, to ensure cheaper loans for industry.
Beating a partial retreat, Ahmad Tavakkoli, one of the plan’s proponents and a leading deputy, asked parliament to give time to both executive and legislative branches to “present a better plan to meet the goal of supporting production”. Parliament agreed the outlines of the plan by a slim majority.
Reform backlash
There is a substantial body of thought in the conservative camp that rejects market economics. Mr Tavakkoli has previously expressed opposition to banking privatisation “at least in the current situation” and last year attacked governments of the past 15 years, including those of Akbar Hashemi Rafsanjani as well as Mr Khatami, for following “the IMF and World Bank methods of handling the economy”.
Iran’s private banks, which hold around 5.5% of banking assets but have expanded their scope and range of services since emerging after a law 2001 ended the state monopoly, are dazed by events. “We could benefit from the state banks removing competent managing directors but it’s somehow difficult to believe it will work out like that,” says one private banker.
Few doubt private capital is already heading out of Iran, although no official figures exist. “Iranian risk has become riskier,” said the analyst. “You can transfer money through Kish easily enough, even though the names are recorded – but capital will in any case always find a way.”
“We cannot keep investors at home at gunpoint,” says Rassoul Seddiqi, a parliamentary deputy. Abdolrahman Soleymani, head of Ahvaz chamber of commerce in south-west Iran, says high lending rates, inflation and restrictive labour laws have all encouraged flight.
According to Ayatollah Mahmoud Hashemi Shahroudi, head of the judiciary, 10,000 Iranian companies already operate in the United Arab Emirates. Estimates of the amount of Iranian money abroad have been as high as $400bn.
Optimists in the banking sector argue the “core” of policy remains set by Iran’s fourth five-year plan of 2005-10 and by its 20-year plan, both of which have passed through all state bodies and been endorsed by Ayatollah Ali Khamenei, Iran’s supreme leader. Should there be an improvement in the international situation through an agreement over Iran’s controversial nuclear policy, say the optimists, the mood could quickly change.
There is also a sense the adverse reaction to Mr Ahmadi-Nejad results in part from the unstable boom of 2003-04. “It was a bubble,” says the analyst. “Look at how high Parsian sold – around six times the book value. The kind of fall we see now – Karafarin, for example, is worth around 40% of its peak valuation a year ago – is partly an adjustment to that.”
Wait and see
It is also unclear whether Mr Ahmadi-Nejad will challenge two previous policies: granting greater independence to the central bank and privatisation of state banks.
Privatisation has been made possible by a reinterpretation of Article 44 of the Iranian constitution by the Expediency Council, a state body that arbitrates between different state bodies. After the EC ruled in December 2004 that the Article was not an obstacle to banking privatisation, the issue has been with Mr Khamenei. The central bank has recommended the privatisation of five banks – Saderat, Mellat, Export Development Bank, Tejarat and Refah – and has even drawn up proposals for public offerings.
The next few months will be crucial on all fronts. “It’s horrible to think everything my generation worked for could be destroyed,” says the banker. “Of course we’ve learned to be improvisers, and we need these skills more than ever now.”
