Global financial crisis a boon for Bangladesh!
Wednesday, 5 November 2008
Khaled Mahmud Raihan
The most talked about issue in the recent financial arena is the global financial crisis which started to show its effect in the middle of the year. The turmoil, however, is rooted in the sub-prime mortgage crisis that began in mid 2007 when two Bear Stearns hedge funds collapsed. During boom times, mortgage brokers were tempted by big commissions, talked with buyers with poor creditworthiness into accepting housing mortgages with little or no down payment and without credit checks. Banks and financial institutions often repackaged these debts with other high-risk debts and sold those to world-wide investors creating financial instruments called CDOs or collateralized debt obligations. The turmoil started with the collapse of Lehman Brothers which was heavily dependent on mortgage market and relied on repurchase market for short-term financing. Shortly after Lehman Brothers, Merrill Lynch filed for bankruptcy which was suffering from the same disease. The rising defaults on subprime mortgages in the US triggered a global crisis for the money markets. Consequently, the world stock markets have fallen, many of the world's leading investment banks and financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.
Bangladesh is a developing country and globalization integrates us with the global market in diverse areas. The recent table talks of different formal bodies presumed that Bangladesh will likely to be equally affected by the global turmoil in the short run as well as in the long run. It is very difficult to predict the scenario in the long term; however, short term impacts should duly be taken into consideration. It is imprudent to consider the economy of Bangladesh as 'vulnerable' as US economy which is basically 'credit oriented' rather than 'savings oriented' that ultimately results in enhancement of debt burden on individuals and the country as a whole. As a consequence, the economy is poised towards vulnerability. The above is eventually the outcome of the deregulations of the so-called regulated countries. However, in the case of Bangladesh, it is unlikely to experience such debacle as our regulatory bodies including Bangladesh Bank (BB) regulates and supervises the financial market strictly. The overall financial leverage in Bangladesh is low and unlike the global financial institutions, Bangladesh's banking system has no toxic derivative engagements that could make overnight default of the financial sector. Even we don't have severe liquidity problem that could lead to a credit squeeze. Moreover, prudential regulations and monitoring by BB has kept the lending-deposit ratio of private banks within a tolerable limit.
However, the most likely affected sector is the export which is heavily dependent on ready made garments (RMG) and jointly with woven and knitwear, it contributes more than 75 per cent to our export. As a matter of fact, our garments exports depend mostly on US and EU markets which are acutely suffering from the turmoil. Different trade bodies expressed their deep concern regarding export orders for garments due to reported decrease in volume as well as delay in shipment. They are also trying to influence the government to rationalise the exchange rate to make export more attractive for the foreign buyers. It is true that our export volume of garments will dwindle for the time being but the situation will not continue for long as most of our export items have low price elasticity and targeted towards relatively lower income group. Moreover, if the condition continues for long, it is expected that our export volume will increase as there might have a paradigm shift of the behaviour of the foreign consumers from costly goods to relatively cheap and quality garments of Bangladesh. We are definitely at the competitive edge over our competitor and can explore new business opportunities through product and regional diversification. However, the government along with the trade bodies should have a keen watch over the issue so that foreign buyers cannot capitalise on the existing global market scenario.
It will not at all be a right move to intervene in the exchange rate in favour of the exporters as ours is an import-oriented country. After a continuous increase in the global price level, the prices of most of our imported goods and commodities started declining for the last couple of months. Oil and commodity prices are expected to remain at their current lows and Bangladesh will definitely get a relief from the sizzling heat of inflation. Moreover, lower imports prices will help improve the terms of trade with favourable implications for the current account of our balance of payments. The likely benefit derived from reduction of the global price level will be eaten up if the government intervenes in the exchange rate policy. But it is a matter of concern that the rate of cancellation of Letter of Credit (LC) for import of essential items has significantly increased due to the substantial erosion of the global commodity prices and put the banks into perplexing position. Proper steps are to be taken to address the issue. The flow of remittance is also not likely to be adversely affected shortly as the lion's share (more than 60 per cent) of remittances comes from the Middle East and less than one-third from US, UK and Germany. It is noteworthy that the first three months of the current fiscal reported remittance flow of TK. 163.57 billion registering 43.38 per cent growth compared to that of the previous year. Even after the recent labour dispute in the Middle East, the remittance flow is likely to continue at an accelerated rate as the infrastructure development projects still continues in those countries.
The two bourses of our capital market continue to register their sharp decline for the last couple of months. The prime bourse of the country Dhaka Stock Exchange (DSE) ended with 2228.21 points in 'DSE Index' and 2684.68 points in 'General Index' as of November 2, 2008.
The trade volume also dwindled and stood at TK. 2490.51 million as on the same day. On the other hand, the 'CSE Selective Categories Index' went down to stand at 5334.05 points while 'CSE All Share Price Index' to 8233.62 points. However, there is no direct relationship between the global financial crisis and our capital market as we all know the foreign investment contribute less than 2.0 per cent of the total equity investment. The situation is driven by the panic behaviour of the market participants which is partially alleged to be transmitted by some top merchant banks in the form of heavy selling. Consequently, individual investors are withdrawing their money from the capital market and bear losses to protect the expected more losses in future. Many of the institutional investors are capitalising on the same by taking possession of the lower priced securities. Instead of being frightened, investors should keep patience in the context of present market scenario.
Considering all pros and cons, Bangladesh is expected to retain its competitive position in the global market in days to come. However, it will be dependent on sensible and timely policy decision which will mostly lie on the newly elected government. If we can avail ourselves of the opportunities and prudently confront the challenges, the global financial crisis will not be a bane for us rather may turn into a boon.
The author is a Senior Financial Analyst of Credit Rating Information and Services Limited (CRISL). The author may be contacted at raihan@crislbd. Org)
The most talked about issue in the recent financial arena is the global financial crisis which started to show its effect in the middle of the year. The turmoil, however, is rooted in the sub-prime mortgage crisis that began in mid 2007 when two Bear Stearns hedge funds collapsed. During boom times, mortgage brokers were tempted by big commissions, talked with buyers with poor creditworthiness into accepting housing mortgages with little or no down payment and without credit checks. Banks and financial institutions often repackaged these debts with other high-risk debts and sold those to world-wide investors creating financial instruments called CDOs or collateralized debt obligations. The turmoil started with the collapse of Lehman Brothers which was heavily dependent on mortgage market and relied on repurchase market for short-term financing. Shortly after Lehman Brothers, Merrill Lynch filed for bankruptcy which was suffering from the same disease. The rising defaults on subprime mortgages in the US triggered a global crisis for the money markets. Consequently, the world stock markets have fallen, many of the world's leading investment banks and financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.
Bangladesh is a developing country and globalization integrates us with the global market in diverse areas. The recent table talks of different formal bodies presumed that Bangladesh will likely to be equally affected by the global turmoil in the short run as well as in the long run. It is very difficult to predict the scenario in the long term; however, short term impacts should duly be taken into consideration. It is imprudent to consider the economy of Bangladesh as 'vulnerable' as US economy which is basically 'credit oriented' rather than 'savings oriented' that ultimately results in enhancement of debt burden on individuals and the country as a whole. As a consequence, the economy is poised towards vulnerability. The above is eventually the outcome of the deregulations of the so-called regulated countries. However, in the case of Bangladesh, it is unlikely to experience such debacle as our regulatory bodies including Bangladesh Bank (BB) regulates and supervises the financial market strictly. The overall financial leverage in Bangladesh is low and unlike the global financial institutions, Bangladesh's banking system has no toxic derivative engagements that could make overnight default of the financial sector. Even we don't have severe liquidity problem that could lead to a credit squeeze. Moreover, prudential regulations and monitoring by BB has kept the lending-deposit ratio of private banks within a tolerable limit.
However, the most likely affected sector is the export which is heavily dependent on ready made garments (RMG) and jointly with woven and knitwear, it contributes more than 75 per cent to our export. As a matter of fact, our garments exports depend mostly on US and EU markets which are acutely suffering from the turmoil. Different trade bodies expressed their deep concern regarding export orders for garments due to reported decrease in volume as well as delay in shipment. They are also trying to influence the government to rationalise the exchange rate to make export more attractive for the foreign buyers. It is true that our export volume of garments will dwindle for the time being but the situation will not continue for long as most of our export items have low price elasticity and targeted towards relatively lower income group. Moreover, if the condition continues for long, it is expected that our export volume will increase as there might have a paradigm shift of the behaviour of the foreign consumers from costly goods to relatively cheap and quality garments of Bangladesh. We are definitely at the competitive edge over our competitor and can explore new business opportunities through product and regional diversification. However, the government along with the trade bodies should have a keen watch over the issue so that foreign buyers cannot capitalise on the existing global market scenario.
It will not at all be a right move to intervene in the exchange rate in favour of the exporters as ours is an import-oriented country. After a continuous increase in the global price level, the prices of most of our imported goods and commodities started declining for the last couple of months. Oil and commodity prices are expected to remain at their current lows and Bangladesh will definitely get a relief from the sizzling heat of inflation. Moreover, lower imports prices will help improve the terms of trade with favourable implications for the current account of our balance of payments. The likely benefit derived from reduction of the global price level will be eaten up if the government intervenes in the exchange rate policy. But it is a matter of concern that the rate of cancellation of Letter of Credit (LC) for import of essential items has significantly increased due to the substantial erosion of the global commodity prices and put the banks into perplexing position. Proper steps are to be taken to address the issue. The flow of remittance is also not likely to be adversely affected shortly as the lion's share (more than 60 per cent) of remittances comes from the Middle East and less than one-third from US, UK and Germany. It is noteworthy that the first three months of the current fiscal reported remittance flow of TK. 163.57 billion registering 43.38 per cent growth compared to that of the previous year. Even after the recent labour dispute in the Middle East, the remittance flow is likely to continue at an accelerated rate as the infrastructure development projects still continues in those countries.
The two bourses of our capital market continue to register their sharp decline for the last couple of months. The prime bourse of the country Dhaka Stock Exchange (DSE) ended with 2228.21 points in 'DSE Index' and 2684.68 points in 'General Index' as of November 2, 2008.
The trade volume also dwindled and stood at TK. 2490.51 million as on the same day. On the other hand, the 'CSE Selective Categories Index' went down to stand at 5334.05 points while 'CSE All Share Price Index' to 8233.62 points. However, there is no direct relationship between the global financial crisis and our capital market as we all know the foreign investment contribute less than 2.0 per cent of the total equity investment. The situation is driven by the panic behaviour of the market participants which is partially alleged to be transmitted by some top merchant banks in the form of heavy selling. Consequently, individual investors are withdrawing their money from the capital market and bear losses to protect the expected more losses in future. Many of the institutional investors are capitalising on the same by taking possession of the lower priced securities. Instead of being frightened, investors should keep patience in the context of present market scenario.
Considering all pros and cons, Bangladesh is expected to retain its competitive position in the global market in days to come. However, it will be dependent on sensible and timely policy decision which will mostly lie on the newly elected government. If we can avail ourselves of the opportunities and prudently confront the challenges, the global financial crisis will not be a bane for us rather may turn into a boon.
The author is a Senior Financial Analyst of Credit Rating Information and Services Limited (CRISL). The author may be contacted at raihan@crislbd. Org)