Friday, January 07, 2005

The Banker: A new economic era for Iran

The Banker: A new economic era for Iran: "A new economic era for Iran
Published: 01 December, 2004
Page 108
Iran is reaping the benefit of economic reforms and its banking privatisation plan is likely to be a springboard to further financial success. Stephen Timewell reports from Tehran.


During the first four years of Iran’s third five-year development plan (2000-2004), its real GDP grew by 5.6% on average, the external current account was in surplus, external debt was reduced to a very low level, international reserves increased and the unemployment rate declined. This performance, described in the International Monetary Fund’s latest Article IV Consultation, has taken place as Iran’s economy has become increasingly open to international trade and investment. It has also been achieved against a background of economic reforms, sustained high oil prices and expansionary fiscal and monetary policy.

Sustained growth

These positive developments have been associated with strengthened confidence in the economy, which has encouraged a rise in private sector activity and foreign direct investment, notably in the non-hydrocarbon sector. The IMF report considered Iran’s key challenges to be further strengthening the foundations for strong and sustained economic growth and diversifying to provide the basis for continued job creation in an environment of macroeconomic stability.

Endorsing the latest reform efforts, the IMF supported the Tehran government’s intention to tighten monetary policy and welcomed measures to contain domestic liquidity growth, such as stepping up its sterilisation operations. It also suggested curtailing the use of direct credit controls, introducing more market-based flexibility in setting rates of return and limiting the recourse by banks to the central bank’s overdraft facilities.

In further supportive measures, the IMF directors welcomed the licensing of private banks and leasing companies and backed Iran’s actions to restructure public banks and strengthen their capital base.

Bank privatisation

One key aspect of financial sector reform going forward is the privatisation of the banking sector. But while a number of privately owned banks have been licensed (see page 124) and the bulk of the state-owned banks will be sold, a significant state-owned sector will remain. Bank Melli Iran, the largest bank in terms of assets, will stay in state hands and expects to expand its role in the region through new operations in Baghdad, Kabul and Dubai (see page 133).

The agricultural bank, Bank Keshavarzi, has undergone a radical transformation in recent years and significantly increased its market share. It is also expected to remain state owned and to continue to have a pivotal role in agricultural finance and retail banking (see page 132). Under Jalal Rasoulof, the chairman of Bank Keshavarzi, more resources will be focused on agriculture in the next five-year plan, especially in the area of insurance. Mr Rasoulof hopes to attract $2bn of foreign direct investment into Iran’s agricultural sector in the next plan through a variety of major projects and pipelines. He also expects to work with the Jeddah-based Islamic Development Bank on a number of water-related projects.

Privatising the banking sector is high on the agenda and the sale of a number of banks was agreed in October. The government plans to retain a 30% stake and 60%-70% will be sold to the public through the Tehran Stock Exchange. According to MR Khorsandi, the director general of international affairs at Bank Sepah, it is not clear which bank will be first – and the sales may be delayed for up to a year – but he is confident his country’s privatisation strategy will go ahead.

Bank Tejarat is another candidate for privatisation. MA Davoud, the director of its international division, is keen to use monies from the Oil Stabilisation Fund to strengthen the private sector. “We are determined to go through the privatisation process. To make our accounts as transparent as possible and to minimise bad debts (less than 1%), we have arranged different mandates for different departments and established credit risk management procedures,” explains Mr Davoud. “Privatisation may be a long way away but there is a possibility for us to be privatised and it would be harmful to the bank not to do so. We are trying to make ourselves ready, we feel banks should go private but it may take two years at least.”

Commercial changes

Shahram Razavi, the general manager of the international division of Bank Saderat Iran, is concerned that the private sector is capable of absorbing a bank such as Saderat. Mr Razavi believes the banks are looking forward to change but adds: “We are too tightly run by government to effect the necessary changes at the bank.” He continues: “The bank needs to be commercialised before it is privatised. Westerners will be very cautious about the risks when Saderat is privatised – the fear is who will take control. Privatisation is going to be difficult but it depends on how it is done.”

Another big bank, Bank Mellat, which was formed by bringing together 10 banks that were owned privately before the revolution, is also looking at the opportunities of privatisation. According Mohammad Ali Nasrollahi Malek, a member of the Mellat board, the bank has a 27% share of the letters of credit market, 2000 branches across the country and is one of the most efficient of Iran’s large banks. An outsider may find it difficult to distinguish between these banks, which offer similar services. The question is whether privatisation will result in significant diversity and whether the banks will be able to boost their capitalisation through the Oil Stabilisation Fund or further capital issues.

Currency devaluation

Recent currency devaluations have caused the Iranian banks to slip down the global rankings as their relative Tier 1 capital figures have fallen in relative terms (in US$). The privatisation process, as well as the recapitalisation procedures taking place for Melli, Keshavarzi and others, will be extremely important in determining how the Iranian banks will appear on the world financial stage.

Meanwhile, as Melli and Keshavarzi expand at home and abroad, the other operators are making some significant moves, particularly in project finance, petrochemicals and gas (see box).

The banks are establishing themselves overseas and high oil revenues are boosting Iran’s economy. The latest IMF report projects real GDP growth at 6.5% in 2003/2004 on account of oil prices and the continuation of the current expansionist economic policy. But that is not the whole picture. As always, politics and foreign affairs play their typically complex role.

The extent to which privatisation actually takes place depends on the political forces at work. There is a desperate need for private sector employment and it is acknowledged that the effective 80% state sector needs to be reduced drastically. However, there is no guarantee that the privatisation many hope for will become a reality. Yet, on a positive note, the Oil Stabilisation Fund provides a generous financial cushion. Oil prices are approaching $50 a barrel, putting Iran in the comfort zone.

There is no shortage of political concerns but, on November 15, Iran helped to calm international worries over its uranium enrichment strategy. The Iranian government told the United Nations atomic watchdog that it would suspend uranium enrichment and processing activities as part of a deal with the EU to avert any UN Security Council sanctions. Iran stressed that its decision to freeze sensitive nuclear work was taken voluntarily to dispel concerns that it was building atomic arms secretly.

However, while Iran has dealt with the enrichment issue for the time being, the presidential elections next May will not be dismissed as easily. With President Mohammad Khatami unable to stand for a third term, a new leader must be elected. Ali Akbar Hashemi Rafsanjani, the president from 1989-1997, is a possible candidate and a moderate. There is plenty of time between now and the elections but much is at stake.

Political uncertainty

Many observers believe the privatisation process could be a springboard for Iran’s further economic success. However, some Iranian conservatives are very much in opposition and foreign investors will remember how Islamic Revolutionary Guards closed the new Imam Kmomeini International Airport in May after the first flight had landed.

The conservatives may return to power but that is not a political certainty. Iran’s transition to an economy that is more open and focused on the private sector is a very positive development but plenty can happen in the months ahead.

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Developments in iran’s banking sector

BANK MELLA
The bank has 13 million customers/depositors. It is the only Iranian bank with a branch in Seoul, three branches in Turkey and a negotiating branch in Canada. It is working on opening a branch in Dubai, by applying to the Dubai International Financial Centre.

BANK SADERAT IRAN
Iran The bank hopes to use its Bahrain joint venture, Future Bank, as its springboard into the region. It has plans to open in Iraq and establish a parallel direct presence. It has eight branches in Dubai. Shahram Razavi, the general manager of the international division, is open-minded about the bank’s structure. He says: “Except for duplicate branches, we are not over-banked, we are over-branched.”
Mr Razavi believes the most important issue is establishing a clear identity and strategy for branches.

BANK SEPAH
In trade, the bank has built a 19% stake in the international market and has established six branches on the free zone of Kish, with representations on Charbaha and Qeshm. The bank is looking for a joint venture and is also considering its role in the Dubai International Financial Centre, possibly through its London subsidiary, Bank Sepah International. Sepah is looking at financing new small and medium-sized enterprises through its co-operation with the Oil Stabilisation Fund.

BANK TEJARAT
This is the only bank with a representative office in Beijing and it has built up a sizeable China-Iran two-way trade of $4bn. After two years, it can apply for branch status in China. Bank Tejarat financed $1.1bn through the Oil Stabilisation Fund for 159 projects over the past two years."

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