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EghtesadOnline: The bond market in Tehran has grown exponentially in the current fiscal year thanks to government endeavors to tap into debt instruments to help cover budget deficits.

Market size was estimated at 2,860 trillion rials ($11.4 billion) by end of the previous calendar month to February 18. The market has grown by a whopping 1,800% in five years, according to a report released by the Securities and Exchange News Agency.  

The figure has doubled to 110% compared to the first eleven months of last year and was 230% higher compared with the same period two years ago. 

Despite meteoric growth, the market is still small when gauged against major economic variables. 

Value of Iran's debt market is only 5.8% of market capitalization of listed companies at the Tehran Stock Exchange. It is on par with 7.9% of total bank deposits and equivalent to 8.7% of the money supply. The figure is 9.7% of Iran's GDP.

Due to the pattern of devaluation of the national currency, value of the bond market has not grown in dollar terms. The value of the market was a little less than $10 billion five years ago. 



Government Supremacy 

A glance at the composition of participants in the market in the past 11 months indicates government dominance. A total of 1,381 trillion rials ($5.5b) in bonds were issued in the period, close to 1,290 trillion rials of which was issued by the government. 

Treasury bills were worth 252 trillion rials, accounting for about 20% of the government bonds. Corporate bonds issued by private sector and participatory bonds issued by municipalities too had a meager share, accounting for 92 trillion rials and 7 trillion rials of the total, respectively.

A corporate bond is a type of debt security that is issued by a firm and sold to investors. The company gets the capital it needs and in return the investor is paid a pre-established number of interest payments at either a fixed or variable interest rate.

Participatory bonds are issued by municipalities in big cities to fund various urban development projects, namely financing urban rail networks, expanding pathways and rehabilitating urban structure. 

The share of bonds issued by the government has increased from 10% in 2014 to 90% now. The widespread presence of the government has resulted in a crowding out effect on the economy. The phenomenon suggests that rising public sector spending drives down private sector spending. One of the most common forms of crowding out takes place when the government, increases its borrowing and sets in motion a chain of events that results in the curtailing of private sector spending.  

Auto, petrochemical and financial companies were among few sectors that increasingly tapped into the bond market by issuing corporate bonds in recent years amid decline in shares of the oil/gas sector.  

This is while basic metals, mass construction, pharmaceutical and cement companies never had a chance to raise a significant fund from debt market. 


Bond Auction

The government’s effort to raise funds for the budget deficits by selling debt is the main reason behind the surge in bond sales. It generated income for budgetary needs mainly through Murabaha bonds, sold largely during the weekly bond auctions held by the Central Bank of Iran. 

The auctions were held every Tuesday since May where the CBI, on behalf of the government, sold bonds to banks, investment funds and retail investors at stock market. 

Chronic budget deficits due to the United States blockade, which hit the economy hard, particularly oil exports, are a major concern for the Rouhani administration. With the US penalties taking a toll on the key oil sector, the government is under pressure to find ways to compensate revenues from diminishing oil exports. 

The central bank has so far held 41 auctions and generated 1,150 trillion rials ($4.6b). Banks and investment funds contributed to almost half the bond buying. Stock market investors accounted for the other half. 

Bonds have reportedly helped cover the budget deficit to a considerable degree and helped restrain government borrowing from the CBI that fueled inflation by increasing the monetary base. 


Tehran bond market Budget Deficits