Thursday, June 16, 2011

Today's M^3 - Iranian Rial Weakens 7% Against the USD in One Week

Today's Major Market Move discusses the Iranian Rial which experienced a 7% drop over the past week. The following table shows it as being the 2nd worst performer after the Belarusian Ruble, which recently underwent a massive devaluation. The Belarusian devaluation actually occurred the previous week and the data provider didn't pick it up until a few days later. So what that means is that Iran actually holds the current top stop in terms of weekly devaluation.

Ordinarily with a move like that, I would be anticipating some saber-rattling rhetoric out of Ahmadinejad to take the focus off of economic issues. But using the stock market as a barometer, the Iranian economy has been performing remarkably well over the past year (up a whopping 76% since June 2010).

(Click on the image for a larger view. Here's a link to the site of the Iranian Stock Exchange.)

Up until the end of 2010, Iran was doling out 60 billion in subsidies. At that time, they began implementing a reform program to wean the economy off of the artificially low prices (coincidentally, that happens to be when the market really took off). The IMF credits this reform program with being largely responsible for the strengthening economy. But not everything is rosy according to this article from Radio Free Europe.

"The IMF institutionally, they really like the idea of markets being pushed towards real prices, taking out distortions, which subsidies are. On the surface, Iran is trying to do that," he says. "But it's really not, because Iran is moving from a model of general subsidies to a model of income support for firms and organizations which are going to be now connected to us [the government] -- i.e., through a Revolutionary Guard network of firms, which are going to be getting everything at preferential rates. The IMF is looking at the picture it is getting and is ignoring what I would call the widespread creeping of Revolutionary Guard firms into the economy at every level."

So if true, rather than a complete phasing out of the subsidies, the Iranian authorities are just changing who the beneficiaries are. If this money is making it into the coffers of Revolutionary Guard-controlled companies which are represented on the Tehran Stock Exchange, that would explain the stock market gains. Income distribution would become more unequal under this arrangement, thus adding to the dissatisfaction of the general populace.

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