Strategy Note /

Bangladesh gets IMF buffer for global risk but equity market still dysfunctional

  • IMF deal lowers risks from global factors like high commodity prices and dollar strength

  • Still to be seen whether currency has moved to a new managed level or full flexibility

  • Price discovery in equities still inhibited by regulatory limits on daily share price falls

Bangladesh gets IMF buffer for global risk but equity market still dysfunctional
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
10 November 2022
Published byTellimer Research

Bangladesh agreed, on 9 November, US$4.5bn of credit facilities with the IMF until May 2026, subject to IMF board approval. This sum equates to 1% of IMF-estimated 2022 GDP and 66% of current foreign reserves.

Bangladesh is not in the same external account distress visible in nearby Pakistan or Sri Lanka: eg foreign reserves import cover is 4.8 months, compared with 1.3 and 2.6, respectively, for those two. But the Bangladesh FX rate is down 16% year to date.

The IMF deal may not guarantee lasting structural reforms, eg fully flexible currency, closure of tax exemptions (tax/GDP is c8%), and full recognition and resolution of legacy non-performing loans and low capital adequacy in state-owned banks (NPLs are c20% of loans in the state-owned banks and c7% in the overall sector, and capital adequacy is c6%, in terms of risk-weighted assets, in state-owned banks, versus the 10% regulatory requirement).

The fact that Bangladesh is not in desperate need of IMF assistance means that policy conditions attached to these facilities are likely not as demanding as those that have caused so much trouble for populist politicians in the likes of Pakistan and Sri Lanka.

The irony is that the de facto one-party state in Bangladesh, under Prime Minister Hasina's Awami League, has the sort of political mandate that is capable of difficult structural reforms should it wish to implement them.

Nevertheless, all global factors equal, it should limit significant further downside in the currency in the short-term.

What the deal does not change is the dysfunction in the local equity market, wrought by regulatory limits on daily share price falls.

Bangladesh FX reserves fall but still above pre-Covid level

Bangladesh Taka cracks after a decade
Bangladesh Taka grew more expensive vs REER since 2012

Net export and consumption growth hit global factors

The combination of Covid disruption, the spike in the commodity prices of imported fuel (net imports averaged 1.5% of GDP over 2015-19, when the Brent oil price was 60% lower) and food (imported food was negative 0.6% of GDP over 2015-19, when the UN food index was 70% lower), weaker demand from Europe and US dollar strength have hit what has, for years, been a macroeconomic story built on:

  • Exchange rate stability, which anchored inflation expectations;

  • Export growth from low-cost garment exports, which generated foreign reserves, jobs (consumption) and urban population growth;

  • Diaspora remittance growth, which generated foreign reserves and fueled consumption (particularly in rural areas); and

  • Consumption growth in extraordinarily dense urban centres, eg the population per square km in its large cities is over 28,000, compared with 14,000 in India and 7,000 in Vietnam).

In the first two months of the current fiscal year, garment exports are up 47% (although the risk to demand, on a full-year view, and particularly in Europe, remains high) and, in the first three months, remittances are up 5%.

Garment Exports, Remittances growing so far in fiscal 2023

Dysfunctional equity market regulation

Bangladesh equities (DSEX index) are down 21%. The narrower, more large company-skewed, MSCI IM index is down merely 8%.

The discrepancy is because the regulator maintains limits on how far share prices (of all stocks) can fall on a daily basis.

Regulation, reintroduced in July 2022, stipulates that the end-of-day closing share price must be no lower than the average closing price of the prior five days.

This has particularly throttled liquidity and accurate price discovery in the larger market capitalisation stocks, where foreign investors are concentrated and are often unable to liquidate positions (because buyers cannot purchase at prices they deem appropriately low enough).

This restriction, in addition to a 2% downside circuit breaker, was first deployed amid the Covid crisis, from March 2020 to June 2021.

All of this means that observed valuation may not be an accurate reflection of the investor consensus. Trailing price/book of the MSCI IMI is 1.0x (for 12% ROE), around a 30% discount to the five-year median. The equivalent discount on offer in Vietnam (Ho Chi Minh index) is nearer 40%.

Bangladesh among the cheaper equity markets in Asia EM, on price/book, if we assume price discovery is efficient

Related reading

External Liquidity Index: Countries at risk of external debt/BOP crisis (Curran), November 2022

Bangladesh Taka is wobbling, but garment export growth de-risks it, May 2022

Bangladesh: 5 charts to mark 50 years of independence, April 2021

Bangladesh corruption exposé dents Awami League's reputation, not its power, February 2021