The ripple effect of potential BDT depreciation

In the aftermath of global financial crisis in 2007, the developed world had an endearing love affair with the emerging countries. The quantitative easing and strong commodity prices made the emerging countries look pretty hot at that time. But with the passage of time, a lot has changed. The commodity prices continue to fall since 2011 and even future outlook for commodity prices is bleak. China's recent quarterly GDP figures missed the targets and the jury is out there to decide the strength of China's economic fundamentals. More importantly, in all likelihood the Fed is going to pull its muscles and raise the interest rates in 2016, if not earlier. With the status quo in mind, it is getting abundantly clear that the endearing love affair with emerging markets was just another fling as capital started outflowing from the emerging markets.
To remain competitive in the export market, the emerging countries in response depreciated their currencies.  There is even a possibility that the currencies will be depreciated further after the imminent Fed tapering. This poses important and critical policy questions to Bangladesh on whether our own currency should be depreciated or not.
Just to have more clear broad picture, let's first look at how the currencies of our major export competitors fared in last one year against USD. A year ago, the BB data suggests BDT was trading at 77.5 per USD and the current BDT/USD implies 1.29% depreciation from last year. But Vietnam, one of our major RMG export competitors, devalued its currencies by 5.33% during the same period. In fact, except for Bangladesh, almost all emerging currencies has seen a pronounced form of depreciation in last one year. In fact, if we devalued our currency exactly as India did, 1 USD would cost BDT 82.1 now.
 After the steep depreciation of 2012, our currency has actually shown a lot more stability in recent years. From historical perspective using the CAGR method, BDT has annually depreciated 5.7%, 3.8% and 3.5% since 1972, 1991 and 2000 respectively. As the data suggests, depreciation of BDT has somewhat slowed with time. In last 15 years, there were only 4 instances when the BDT depreciated more than 5% against the USD. While it is difficult to gauge the extent of depreciation, let's look into those instances when BDT depreciated more than 5% against USD.
If a substantial depreciation of BDT indeed goes ahead, there will be obvious implications for both importers and exporters. As both Rupee and Yuan fell a lot more than BDT did in past year, importers enjoyed the benefit of the strength of BDT against USD. Although Bangladesh is a net importer, its export competitiveness is also of paramount importance.
A potential opportunity is out there for Bangladesh as China is grappling with rising labor cost and as China is focusing more on high end manufacturing these days, Vietnam and Bangladesh are predictably licking their lips.
Trans-Pacific Partnership (TPP) has probably the greatest implications for Vietnam. While its almost $3 Billion size of Pharmaceutical industry will take a severe hit because of TPP, the biggest gainer will be Vietnam's RMG sector. According to some estimates, the cumulative future benefit of TPP for Vietnam's RMG is likely to be approximately $50 Billion by 2025! The catalyst of TPP coupled with its currency's devaluation in 2015 gives a clear edge over Bangladesh for the RMG exports at least in US market. To compete with Vietnam and remain a lucrative alternative to China's RMG business, BDT devaluation seems increasingly likely.
Apart from the obvious implications of currency devaluation on importers and exporters, this may well be a big news on many of the prime borrowers in our country. Currently, outstanding total foreign-currency credits stood at around USD 8.0 billion. The outstanding amount of foreign credits includes loan extended by Offshore Banking Units of local and foreign commercial banks and direct borrowing by the corporate entities. Most of these loans cost around 5%-6% to the borrowers. The loans were mostly taken at a time when the borrowings from local banks would cost close to 15%.
In the event of currency depreciation, these borrowers of low-cost fund will find themselves in a different reality. As the banks are flooded with excess liquidity due to weak private sector credit demand, lending rates have fallen quite drastically. The weighted average lending rate for all banks came down to 11.48% in September, 2015. With 5%-6% devaluation of local currency, the benefit of low-cost borrowing basically gets wiped out. In fact, if BDT depreciates even more than that, the supposedly low-cost funds may actually turn out to be more expensive than local borrowings.
While the private sector credit growth hovered around 12%-13% in 2014, inflow of low-cost foreign fund for private sector actually increased by 17% in the same period. With the potential currency depreciation  and resultant impact on the borrowers of foreign loans, borrowers will be more incentivized to borrow from local banks and hence, private sector credit growth may see an uptick after an extended dull period. Therefore, along with boosting exports, a potential BDT depreciation may also play a role in private sector credit growth.
Abdullah Al-Rezwan is a Research Analyst at BRAC EPL Stock Brokerage Ltd. [email protected]