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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006
TEHRAN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
With healthy oil revenue allowing increased
spending, and his adoption of populist
approaches to the nuclear as well as social
issues, the president is less vulnerable to
internal political pressure than had initially
been thought. The only serious challenge to
his authority comes from fellow hardline
conservatives, who control the legislature and
the judiciary. Although the radical policies
espoused by Mr. Ahmadinejad genuinely
alarm more traditional conservatives, Ayatollah
Khamenei is likely to maintain his support for
the president.
Iran's international relations will be dominated
by the question of whether international
agreement is possible over the development
of its nuclear power program. Efforts by
Europe and Russia to reach some form of
compromise with Iran are likely to continue.
There are increasing signs of a desire on both
sides to achieve a negotiated outcome that
can prevent a build-up of tension and possible
moves through successive UN Security
Council resolutions towards economic
sanctions and even military action.
Mr. Ahmadinejad's electoral appeal rested on
his advocacy of more equitable economic
opportunity–above all, the fairer and more
expansive distribution of Iran's oil wealth.
This is likely to manifest itself in strong
government spending, including steeper
increases in public-sector wages and firmer
support for conservative-leaning
institutions–all policies pursued by the
conservative-dominated Majlis. Exceptionally
strong oil prices are likely to encourage and
facilitate such policies over the forecast
period, and with large fiscal and current
account surpluses over the near term, these
could prevent financing pressures after 2007.
However, relatively high spending also carries
strong inflationary risks, particularly given
threats to the monetary policy framework
stemming from efforts by elements within the
Majlis to further reduce lending rates–a policy
that Mr. Ahmadinejad seems to support.
Economic Performance
Real GDP growth in fiscal year 2005/06
(ending March 20th 2006) was 6.3%.
Growth is forecast to ease to 5.4% in 2006/07,
as oil output declines and import expansion,
though slowing, remains strong. However,
with oil revenue still rising on the back of
exceptionally high oil prices, fiscal expenditure
growth will stay strong. This in turn will
continue to contribute to high levels of private
consumption and investment. Overall growth
will ease more markedly in 2007/08, as both
oil prices and output levels decline. However,
oil revenue will remain comparatively strong,
resulting in firm, albeit declining, growth in
public spending. Investment and private
consumption levels will continue to rise, albeit
at a slower rate, resulting in a forecast real
GDP growth figure of 4.5%.
The average rate of inflation fell to 13.4% in
2005/06, from 14.8% the previous year. This
decline is surprising, given liquidity pressures,
rapidly increasing demand and low interest
rates. Despite recent agreements to freeze the
price of some goods, inflation is expected to
rise in 2006-07 as oil revenue continues to
boost liquidity levels. Average inflation is
therefore forecast to increase to around 15.4%
over the forecast period. Limited monetary
policy tools make the task of combating
inflation difficult for Bank Markazi (the central
bank), leaving it largely dependent on arguing
the case for restricting government spending
growth.
The central bank will continue to allow the
rial to weaken in nominal terms over the
forecast period, in order to support the
competitiveness of non-oil exports. However,
in trade-weighted terms the "depreciation" will
be much less marked, and in real terms the
rial will continue to strengthen against the US
dollar. The pace of nominal exchange-rate
decline is expected to be little changed, at just
over 3%, in 2006/07, leaving the rial at an
average of IR9,279:US$1 as the US currency
falls only marginally against the euro. The rate
of depreciation is forecast to slow to 2% in
2007/08 as the dollar strengthens, leaving the
rial at an average of IR9,514:US$1. Given
strong inflation, these projections imply
considerable real appreciation against the
dollar and a broader misalignment of the
currency, a trend that will have to be
addressed eventually.
* Economic Intelligence Unit Ltd., July 2006.
Key Information Contacts
TSE Services Company www.tsesc.com
Central Bank of the Islamic Republic of Iran www.cbi.ir
Iranian Chamber of Commerce, Industries and Mines (ICCIM) www.iccim.com
Organization for Investment, Economic & Technical Assistance (OIETAI) a division of the Ministry of Finance: www.investiniran.ir
2003-ORIGINS OF GROSS DOMESTIC PRODUCT (%) (a)
2004-COMPONENTS OF GROSS DOMESTIC PRODUCT (%) (a)
Services
Industry
Oil
Private consumption
Gross fixed investment
Public consumption
Net external sector
Agriculture
32.9
60
50
54.2
48.9
40
35.2
10.8
7.4
30
20
10
0
10.9
-10
-7.1
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