FX board for foreign investors

Increasing foreign capital is among one of the major goals stipulated in stag-exit package introduced by the government. Foreign investment in Tehran stock exchange is not a new event. However, their share of 7.6 million shareholder codes amounts to just 295. Government officials are determined to pave the grounds for attraction of foreign investors in the Iranian capital market. They have been asking themselves what instruments are needed for this purpose. Ali Rahmani, the former president of stock exchange company talks about the plans aiming at absorption of foreign investment during his tenure. However, due to structural complexities as well as lack of efficient fiscal instruments impeded the plans. He considers new propaganda as sheer slogans and ironically mentions that foreign investors need something more than a charming song of love.



The government has suggested some plans for the capital market in its stag-exit package. In your opinion, how can the grounds for the arrival of foreign investors be provided?
Stability of FX rate is the first factor. In a condition when the government itself imposes policies that shock the market and change the rates, we cannot expect the foreign investors to exchange their money into rial and make investments. For example, if an investor had entered the stock market in 2011 and bought shares in rial, they would have received 100% loss although the market yielded 100% profits. This is because the rate of foreign currency has depreciated considerably since then. It is vital for any investor to be able to predict and cover risks.

It means that foreign investors will find no incentive unless they can de-risk the market. Is it true?
Absolutely. Risk coverage is crucial for foreign investment. Fluctuations of FX rate can incur severe risks and any investor needs to bear them in mind so as not to receive losses. When I used to hold the office, it was planned to establish an FX stock market in Kish Island so that foreign investors feel more secure while entering Tehran stock exchange. But the plan never materialised.

Do you imply that FX stock exchange in Kish Island can cover FX risks for foreign investors?
That is true. However, it requires a number of listed top companies to be transferred to Kish free zone and convert a part of their shares into foreign currencies so that investors can purchase them and make transactions in their own money. This is de-risking or hedging in the market.

It is, therefore, required to establish infrastructure and define related fiscal instruments in the capital market.
Undoubtedly. Establishment of FX stock market for foreign investors requires infrastructures. The vacuum is deeply felt in the country. There must be an FX board in the market. Of course, there are other alternatives for foreign investors to cover risks. For instance, they should be allowed to make FX deposits in Iranian banks based on which, they take loans in rial and make investments. In this way, we can provide the foreign investors with shields against market concerns.

But some officials believe that low P/E in the stock market offers better opportunities for investors to enter the market and make profits.
I do disagree. Low P/E is not attractive enough to persuade foreign investors to enter the market. Unless they can hedge in the market, investors refuse to enter. As I already emphasised, new infrastructures must be established and all needs of foreign investors be taken into account. It is not sufficient just to start an FX stock market in free economic zones; provisions should also be made to give dividends to foreign investors. Another company is needed to make it possible for foreign investors to get involved in financial transactions. Connections between Iranian monetary system and those of other countries are as important.

Then, foreign investors cannot enter Iranian stock market as long as the Central Bank is sanctioned and it is impossible to transfer money abroad. Do you think advancements in nuclear negotiations could help absorption of foreign capital?
Failure in money transfer due to sanctions is an extreme issue for foreign investors unless some of them take high risks and intend to enter the market whatever the cost. There are some funds around the world which take high risks. Some Iranian funds are similar and there are many risk-takers. However, they are not appropriate for foreign investors because they lack the required infrastructure. Instead of making infrastructures and necessary tools, the authorities shout slogans and make void promises. They are wasting time singing love songs and expect foreign investors to fly in. they need to first pave the grounds and then invite foreign investors. They should learn lessons from the experience of other countries such as Malaysia and imitate their approaches. Unfortunately, the number of foreign investors in Tehran stock exchange if too few and there is a long way ahead.