Major credit crunch unlikely in Bangladesh

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FE Report
The external shocks stemming from the global financial storm are unlikely to spell a major credit crunch in Bangladesh as the country's financial leverage remains low, according to the World Bank.
The global lender, whose growth projection has drawn angry reaction from policy makers, has said that the country's resilience to the global economic woes lies in large part on its relative insulation from international capital markets and a paltry foreign portfolio investment.
The Bank said the Bangladesh economy could shrink at 5.7 per cent in the financial year 2009 on the back of lower remittances inflow as the crisis envelops the oil-rich Gulf economies. Remittances from the Middle-Eastern countries account for around 63 per cent of the country's total remittances.
"This (resilience) is due to the low level of external debt, strong international reserves and the small level of foreign direct investment," the Bank said.
"Unlike the global financial institutions, Bangladeshi banks have no exotic or toxic derivative engagements. The off-balance sheet items are mostly very basic swap contracts, which should not create any significant unexpected losses," according to the Bank's preliminary assessment of the financial sector effects.
The Bank said that the foreign exchange reserves of Bangladesh Bank and commercial banks have limited exposure to the securities markets of the United States and European Union nations, enabling it to ward off any major disaster for the country's financial sector.
It added the country has a largely closed capital account, and capital flows are in the form of soft loans and foreign direct investment.
As of September 2008, Bangladesh Bank's foreign exchange reserves amounted to US$5.8 billion. In the financial year 2008, the country's net foreign financing, mostly concessional borrowing from multilateral lenders, totalled $1.75 billion, while foreign direct investment was $650 million, accounting for only 0.8 per cent of GDP.
Ruling out the losses, central bank officials say almost entire chunk of the reserves is held in short-term liquid assets with foreign central banks and scores of AAA-rated foreign banks in the United States and Europe .
The officials, however, noted that an insignificant slice of the reserves could be exposed to risks, given the fact some of banks, where money is deposited in short-term liquid assets, face downgrading against the backdrop of the credit crunch, triggered by sub-prime lending crisis.
But they said the overall vulnerability of the reserves should not be a major cause of concern.
The country's commercial banks, which have an estimated $500 million of foreign currency deposits in multiple US banks, have reportedly brought the major portion back to Bangladesh .
The World Bank's assessment attributed the country's relative insulation from international capital markets and the "negligible" role of foreign portfolio investors to what it called "remarkable resilience" to the global financial turmoil.
It also said the strength came from strong macrofundamentals.
Commercial banks dominate Bangladesh's financial sector with banking assets accounting for 52.84 per cent of GDP (gross domestic product).
The domestic bond market is overwhelmingly dominated by the government. Domestic bonds' outstanding accounts for 12 per cent of the GDP, at $7.30 billion, which is the smallest in South Asia .
The bond market, at almost three times the size of equity market capitalisation, the World Bank said, showed that the equity market was still in its infancy.
Equity market capitalisation to GDP had doubled over the period from 2.57 per cent in 2001 to 5.41 per cent in 2006.
"This is the least developed market compared with other stock markets in the region," the Bank said.