Iranian Economy Worsens.

Under US-led Western and GCC pressures and UNSC sanctions, Iran's economy is in bad shape, with inflation now running at the rate of 27.6% - the highest in the Middle East. While no major investment in Iran has been made by foreign companies since the June 2005 election of Mahmoud Ahmadi-Nejad as president, big Iranian capital has been fleeing the country on daily basis.

While there is an unprecedented economic boom in the GCC region, there is a recession in Iran. The only sector booming in Iran is that of property, with land and apartment prices in upper middle class areas in the cities having sky-rocketted in recent years. Iran's stock exchange is also doing well, but its activities are limited to Iranian investors - with the number of foreign investors being negligible.

Iran's oil income in the first seven months of 2008 is estimated at $54 bn, compared to $57 bn in the whole of 2007. But the combined oil revenues of the six GCC states in the first seven months of 2008 are estimated at $261 bn, compared to $390 bn in the whole of 2007. Iran's petroleum sector is suffering - all the way from the upstream to the refining and fuel retail businesses. Iran is losing 500,000 b/d of crude oil production capacity every year, and its refining capacity is far short of the country's demand for fuels. Iran is the largest importer of gasoline and diesel in the Middle East - having to keep subsidising fuel prices and the burden on the treasury is quite heavy.

For the Tehran Stock Exchange (TSE) to prosper in the longer term, foreign investors need to make significant share purchases. But the best-performing market in the Persian Gulf, the TSE is the hardest for foreigners to understand. Investors have pushed up the value of shares on the TSE as more of Iran's state-owned firms have floated stakes. The TSC's main index, the Tedpix, has grown 41% since the start of 2008, while stock markets in the GCC have lost value. The MSCI GCC index, which measures the performance of seven major Gulf markets, has lost 17% of its value since the beginning of 2008. Emerging markets as a whole have fallen 21%.

So far, the Tedpix has been driven by domestic investors, including wealthy Iranians, public sector pension funds and the investment arms of state-owned banks. The TSE has no restrictions on foreign ownership, but few foreigners trade in the market.

There are many reasons why GCC investors are avoiding the TSE. Listed companies often provide little information about their workings. When Telecommunications Company of Iran (TCI) floated a 5% stake on Aug. 9, potential investors only had an un-audited financial statement from the previous financial year to guide them. The government wants to sell another 26% in TCI before end-2008, but lack of transparency will be a problem. Foreign funds will want clearer insights into TCI's strategy as well as audited accounts before they follow domestic investors.