• Iran settles million of dollars of overdue payments to contractors in treasury bills
  • Central bank is expected to issue $300m of short-term sovereign debt on 5 October
  • Iran’s financial sector and debt markets suffer from low liquidity

Iran has paid major contractors through treasury sukuk (Islamic bonds), ahead of a planned sovereign debt issuance.

The one-year bonds have an interest rate above official central bank rates of about 20 per cent, according to the local Securities and Exchange News Agency (Sena). The bills have been tradeable on the local Fars Exchange from 30 September.

About $330m of overdue payments have already been made by the Ministry of Roads & Urban Development (MRUD) in the form of bills, according to the local Financial Tribune. The MRUD plans to transfer another $992m of treasury bills to contractors by March 2016.

The MRUD is responsible for Iran’s rail network, in which it plans to invest IR70 trillion ($2.3bn).

Iran’s Ministry of Finance also plans to issue about $300m of short-term sovereign debt on 5 October, according to Sena. The sharia-compliant bonds will be offered at a steep discount as this is the first such issuance. They are intended to develop Iran’s debt capital markets and increase liquidity in the banking sector.

“There is a lack of liquidity in the market,” says Parham Gohari, a partner at Dubai-based Frontier Partners. “The financial sector in Iran has huge cashflow issues. One way to pump additional cash into the economy is to issue Islamic bonds.”

Depending on investor appetite, Iran may issue another $600m of sovereign sukuk in the next few months. The central bank can issue up to $3.3bn in sovereign sukuk before the end of the financial year in March 2016.

The Islamic Republic’s economy is hampered by very low banking sector liquidity due to poor risk management and sanctions on the financial sector. While the Central Bank of Iran officially puts non-performing loans (NPLs) at about $30bn, the real figure is thought to be double this.

Investing in short-term government bonds would reweight banks’ balance sheets and allow them to lend more.

It may also stimulate dormant corporate debt markets, despite low liquidity and transparency.

“We have come across 150 to 200 private companies that are looking at issuing bonds,” says Gohari. “In my opinion, there’s a lack of liquidity and trust in the system as a whole. There are very minimal volumes of issuance.”

However, this situation may change if EU and UN sanctions are lifted, which could happen in early 2016.

US-based Moody’s Investors Service expects the potential re-entry of Iran into International Islamicfinance markets to be a significant boost to sukuk volumes. However, issues remain around the lack of a unifying framework for the instruments, and continuing sanctions.

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