South Asia Sweep Attempts History Rewrite

Half a century ago Bangladesh summoned a stereotype image of “poor starving children.”  This year, as the country marks 50 years of independence from Pakistan, which in 1971 was 70% wealthier based on per capita GDP, the tables have turned, and it is 45% richer.  Moreover, the country Henry Kissinger referred to as a “basket case” in the 1970s, last month provided USD 250 million in loan assistance through a currency swap to neighboring Sri Lanka where per capita GDP is nearly double. On announcing the bailout for Sri Lanka, Bangladesh also cancelled the debts owed by Somalia and Sudan.

Stock exchange performance also highlights Bangladesh’s successes as compared to its neighbors.  Despite having the smallest market as measured by market capitalization/GDP at 9.2%, the Dhaka Stock Exchange, with some 320 listings has advanced 3% so far this year. Despite a sell-off in recent weeks as Covid cases spiked, it is up 40% on an annual basis in dollar terms on the MSCI Frontier Index.  The largest with market cap/GDP at 20% is Sri Lanka, is the smallest in absolute terms with total market cap of only USD 16 billion. It has lost more than 10% year-to-date and is up only 10% on an annual basis.  Pakistan, with the largest market cap in USD terms at USD 57 billion, 15.6% of GDP, has lost more than 9% so far this year and is flat year/year.  Karachi, with more than 575 listings, is expected to be officially downgraded to frontier status by MSCI from the core EM Index in November after breaching size and liquidity rules for nearly two years despite 8 IPOs in the fiscal year just ended, the highest since 2007.

Debt metrics also put Bangladesh in the lead with total debt/GDP below 40% compared with Sri Lanka’s near 100% and Pakistan’s 90%.  Sri Lanka’s foreign exchange reserves are dwindling as it faces massive external debt servicing, including a USD 1 billion sovereign bond repayment at the end of the month.  At end-June Colombo’s reserves stood at USD 4 billion, only 2.7 months of imports. To boost reserves, the country has arranged swap facilities and loans with the People’s Bank of China and Reserve Bank of India, and it expects USD 780 million from the IMF’s SDR allocation.  At the same time, it has imposed a series of export controls to minimize hard currency outflows. Bangladesh meanwhile has record high reserves of USD 45 billion, 8 months of import coverage, boosted by USD 25 billion in remittances in the fiscal year that ended in June. They were up 35% and accounted for 12% of GDP. Pakistan, under a 3-year USD 6 billion IMF program agreed in 2019, has USD 16 billion in reserves, barely over the agreed 3-month minimum import coverage level necessary to avoid a crisis.

After Bangladesh’s economy grew 8.2% in FY19, it eased to 3.8% in FY20 but came in at 5% in the FY just ended. The IMF is expecting GDP to expand 7.5% in FY22. The economy benefitted from a rebound in exports, especially garments. Readymade garments account for almost 16% of GDP, more than traditional agriculture now at 13%. Exports of clothing soared 13% in FY 21 but were still 7% below FY19, according to the country’s Export Promotion Bureau.  Sri Lanka’s economy contracted 3.6% in 2020 and may rebound by the same figure this calendar year, according to international ratings agencies. However, with the Delta variant surging throughout the region and vaccine supply shortages, the critical tourism industry is far from recovery even before a giant oil spill ruined beaches.  In 2019 tourism/hospitality accounted for about 12% of GDP, the third largest foreign exchange earner. Pakistan’s economy contracted only 0.4% in 2020 and is expected to expand 1.5% this year, according to IMF data, boosted by continued investment from China under its $60 billion Belt and Road ambition.

Despite Bangladesh’s leading edge in select measures its stock market is illiquid, with only a handful of stocks with market cap over the USD 1 billion mark required by many international institutional investors consigning it to the fringe of the frontier cohort. In addition, since 2017 the country has hosted some 1.1 million Rohingya refugees from Myanmar, spending an estimated USD 1.2 billion/annually.  Following the military coup in Myanmar in February, repatriation of the refugees is not an option. The government is concerned not only about cost amid the Covid crisis, but internal security due to alleged recruitment of refugees into extremist groups.  The uptick in Covid cases is plaguing all three South Asian countries and the spike in commodity prices, especially oil and food, will weigh through the year. However, at independence Bangladesh’s poverty rate was estimated to be 90%, falling to 44.2% two decades later, and down to 20.5% by June 2019 before Covid returned it to 30%. The blow has accelerated the search for a globally competitive economic model beyond garment exports, as the subcontinent also strives to definitively raise subpar, typically overlooked when buoyant, stock market showings.

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