A record boom in Tehran's stock market will end in a spectacular crash that could trigger a prolonged depression producing multiple bankruptcies, mass unemployment, and acute economic hardship, analysts say.
The warning follows months of soaring share prices that have prompted officials in Iran's Islamic regime to proclaim that the country's economy is flourishing despite fresh international sanctions aimed at combating its nuclear program.
The Tehran bourse index passed 17,900 on August 30, compared to 12,537 points on the final day of the last Iranian year in March, following a sustained wave of stock sales and purchases. The upward trend has pushed the exchange's total value to more than $80 billion, up from $70 billion in mid-July.
However, the bull market has been dismissed as a "state-created bubble" by seasoned analysts who attribute it to the deliberate buying and selling of assets by supposedly private companies that are in reality owned by organizations like the Islamic Revolutionary Guards Corps (IRGC), which has been playing an increasingly dominant role in Iran's economy.
One economist says a stock-market crash is "inevitable" and could result in a disastrous financial collapse comparable to those that afflicted Russia in 1998 and Argentina in 2001, with grave consequences for Iran's political and social stability.
Iranian officials have dismissed such criticisms. Ali Sahraei, the Tehran Stock Exchange's operations manager, said the rise reflected an overall improvement in the Iranian economy.
"Concern about bubble growth are unfounded," the foreign-based "The National" newspaper quoted him as saying in a statement released through the bourse. "The reason for the rise in the index is the flow of cash into the stock market."Beneath The Surface
The boom has perplexed market analysts. Ahmad Alanani, Middle East and North African regional director of Exotix, a London-based investment bank, previously described the Tehran market as "underperforming" but now says he is puzzled.
"I thought it was underperforming before in the context of the Persian Gulf, but it has stopped making sense," he says. "Every other single index in the world has come off in the last month, the Persian Gulf is in a lull -- yet the Tehran Stock Exchange is on an upward trajectory and that doesn't make sense to me."
He said that while he hadn't been following that market particularly closely of late, when he last checked he didn't see "bank-leveraged trading" as especially prominent. "That could have changed now -- it could be a lot of hot money that's inflating valuations," Alanani says. "But you also hear some positive things about Turquoise Funds, which is raising money from Iranian expatriates. It's a very tricky market to judge because despite everything, it remains a bit closed."
Such warnings mirror disquiet in Iran's parliament, the Majlis, which has ordered an inquiry amid doubts among lawmakers over the boom's causes and potential effects.
Mehrdad Emadi, a London-based Iranian economic consultant for the European Union, conducted an investigation that he says uncovered solid grounds for suspicion. After examining the share prices of seven of Iran's biggest companies -- including the giant Mokhaberat telecommunications corporation, taken over last year by an IRGC-led consortium -- he concluded that the increases were driven by government-led manipulation.
"There is absolutely no rational explanation in a country where productivity has been falling in the last 28 months consistently, [where] every quarter profitability has been negative for 92 percent of state-owned banks, and the banking system is highly indebted, to see such a boom in stock prices," Emadi warns. "They do not reflect the profitability, they do not reflect the confidence in the economy, so it tallies that it is the reflection of the injection of new demand and money. Obviously this is kind of a bubble. But it is a state-created bubble, instead of sort of a market-induced bubble."
But it lacks the hallmarks of a classic stock-market boom, Emadi's investigation found. Three of the companies surveyed actually showed losses and negative rates of return over a period after April 2009, once inflation was accounted for. Private individuals wishing to sell shares were quoted lower rates than the official market price for transactions between companies -- effectively meaning a two-tier system was in place. And the high trade volume and increased profitability normally associated with such booms was absent.Interested Parties
The upward cycle benefits both buying and selling companies by enabling them to borrow more -- something all firms in Emadi's survey have sought to do. Increased borrowing is in line with official policy, as reflected by Iran's Central Bank governor, Mahmud Bahmani, last week when he asked parliament's approval to use $15 billion from emergency foreign-currency reserves to finance greater lending by the banks, which are thought to be near bankruptcy.
Critics say Iran's banking system is highly indebted.
The goal, Emadi believes, is twofold: to encourage confidence in the economy and thereby prevent capital flight; and to prevent a banking collapse by persuading small depositors to keep faith in the banks.
"The government has acknowledged that the biggest front they are fighting in managing the country is economic, and in that aspect of crisis management banks are an early warning system," he says. "When people feel really insecure about the ability of banks to meet their obligations, they pull out their money. We have seen this in Mexico, in Argentina, in South Africa. They pull out their deposits, convert it into hard currency and buy gold. If this happens, it's conceivable that within a couple of months we could see very big state-owned banks going bankrupt and that would be an outcome that government really would not be able to manage and cope with."
One other motive could be the government's policy of dispensing "justice shares" under Iran's privatization law, which reserves 20 percent of all privatized shares for the poor. President Mahmud Ahmadinejad's government may be seeking to placate a constituency already hit by sanctions and facing the prospect of further hardship with the phasing out, due to begin later this month, of state subsidies on energy products and other goods. Subsidies cost the Iranian treasury an estimated $100 billion a year but critics have warned that their abolition could stoke inflation and provoke social unrest.
Meir Javadenfar, an Iranian-born commentator with the Middle East Economic and Political Analysis company in Israel, says rising share values help the government offset the effects of sanctions and the abolition of subsidies. "The government knows that both are going to create a lot of dissatisfaction amongst the poor," he says, "And by keeping the share prices higher, it is trying to deflect criticism and the repercussions of such criticism from people, especially the lower income brackets of society who are mostly government supporters."Pressing Question
The downside of the boom is that it is almost certainly unsustainable -- and the Iranian economy is unlikely to enjoy the benefit of a soft landing. Instead, economists like Emadi fear a crash that could prompt the panic-selling of assets at knock-down prices, companies defaulting on their debts and bankruptcies leading to mass joblessness, already estimated to have risen by at least 40 percent during Ahmadinejad's five-year tenure.
"If you have a crash in the stock market and lots of these companies -- say, just for the sake of argument, 20 percent of them -- go bankrupt. Given that 75 percent of private-sector employment is really through state-owned companies, that could easily translate to another 1.5 million people losing their jobs," Emadi says. "You have the typical components of a financial crash leading to very, very deep and probably longish -- maybe longer than a year -- depression, where you will have more companies going bankrupt, more banks declaring bankruptcies, and people losing their jobs. They will start selling their household furnishings. And once you have that, it's going to be very, very difficult for people to survive."
The decision by parliament -- many of whose members have been fiercely critical of Ahmadinejad's economic policies, including the plans to abolish subsidies -- to investigate may be fueled by such fears, according to Javedanfar.
"It is very possible that those people in the Majlis are worried about the repercussions of a sudden crash. If and when it does happen, the political repercussions could be massive and they could impact the stability of the country. After the disturbances we saw consequent to Ahmadinejad's reelection, this is a blow which some elements in the regime do not want and do not need," Javedanfar says.
"There's nothing wrong with Tehran's stock exchange increasing. Iran has fantastic potential to do that. But there's everything wrong when it's done in such an artificial way, because if and when the house falls apart, the repercussions will be felt everywhere in Iranian society and also very likely, within the corridors of power inside the supreme leader's office."