Bangladesh’s Forsaken Vortex Victims

Bangladeshi shares were off 30 percent through February at the nadir of the MSCI Frontier group as authorities scrambled to contain the correction’s financial system fallout and intensified negotiations for an IMF extended credit facility. The Dhaka exchange is down one-third from its end-2010 peak despite organization of an official rescue fund after disgruntled retail investors demanded an investigation into the collapse which uncovered unchecked margin lending and insider dealing beyond the scope of securities commission enforcement. Banks had direct exposure through their capital which will be limited to 25 percent of the total under new rules, and also through separate subsidiaries which were under-supervised at the same time credit-deposit ratios veered toward 100 percent on annual double-digit portfolio expansion. State-owned institutions may be weakest in equity and liquidity terms, and along with the central bank have been big government debt buyers to plug the 4 percent of GDP budget deficit. Growth churns at 6 percent on healthy garment exports and remittances, but inflation is at twice the figure on imported fuel and food expense. Lower aid inflows contributed to current account slippage and reserve depletion last year as the currency depreciated 7 percent against the dollar. Tax revenue lags at just over 10 percent of output, and electricity and fertilizer subsidies absorb one-fifth of spending. With the oil company’s imminent needs for non-concessional borrowing, an initial speculative-grade sovereign rating was obtained in 2010. Monetary policy has been tightened and strides toward greater interest and exchange rate flexibility are on course, but progress could be faster and corporate governance remains subpar, the latest IMF Article IV report comments. In an effort to boost accountability the Dhaka and Chittagong bourses are to be demutualized and cross-border links with India are under consideration as free-trade arrangements deepen with tariff cuts.

In Sri Lanka equity performance to date has also been negative as post-civil war growth eases from the recent 8 percent and rupee devaluation aggravates inflationary tension. Foreign reserves dropped 25 percent to $6 billion the past year and the central bank hiked rates and introduced credit curbs to choke import appetite. Infrastructure rebuilding and tourism have underpinned rebound despite commercial and diplomatic unease over the regime’s authoritarian tendencies and nepotism. The 10 percent overseas ownership ceiling on domestic bonds was bumped slightly, but another external issue is not on the horizon after consecutive oversubscriptions. Investors have drawn parallels with Vietnam’s low reserve level as it faces steep short-term repayment obligations. Money has gone instead into shares up 20 percent on the advent of single-digit inflation and trade balance improvement as the Tet New Year ushered in an overweight offensive.