Bangladesh’s domestic bond market is very small but it offers fixed-income investors a way to access the country’s growth story.
Speakers at FinanceAsia’s Bangladesh Investment Summit in Singapore on September 1 touted the currency’s stability and the country’s track record of having never defaulted.
Mohammad Mamdudur Rashid, deputy managing director at Brac Bank, said interest rates are beginning to fall, which should drive more companies to issue bonds, expanding the $18 billion onshore market.
The biggest gap is the lack of an international sovereign bond. Biru Paksha Paul, chief economist at Bangladesh Bank, the country’s central bank, said the government was considering issuing one, although nothing is imminent.
Paul noted credit is expanding in Bangladesh. In 2014, private credit grew by 15% and public credit by 23.7%, he said. Today the bond market is about 10% of GDP; total government debt is 20% of GDP, low compared to both South Asian neighbours and to other frontier markets such as Vietnam or Nigeria. (Bangladesh’s GDP is $174 billion).
The local bond market is mainly comprised of Treasury bonds and Treasury bills, with tenors as long as 20 years. Corporate issues consist mostly of tier 2 subordinated bonds issued by private commercial banks. There is also a small but growing market for commercial paper.
Bangladesh is not rated investment grade but all three major credit rating agencies have maintained a stable outlook for the past six years. Rashid said credit quality is improving. The country is rated Ba3 by Moody’s Investor Services and BB- by Standard & Poor's and by Fitch.
The central bank has helped keep the taka stable, and it has grown its foreign exchange reserves to $25 billion, enough to cover six-to-10 months of imports. Its goal is to reduce interest rates in order to spur credit growth and support economic expansion, said Paul. The central bank can’t control inflation, and lacks solid employment data, so its primary target is GDP growth rates.
Today the central bank is expecting GDP growth this year to reach 7% and inflation to remain moderate at 6.2%. The policy rate for repurchase agreements (repo rates) is 7.25%, which Paul said is too high given an environment of low interest rates.
The 2-year Treasury bond currently yields 7.2% and the 10-year yields 8.39%.
Bank deposit interest rates are high, however, at 13%, which hinders bond issuance. Those rates stem from an earlier period when inflation was high, touching almost 11% in 2011. The central bank has helped reduce inflation but deposit rates haven’t followed suit. Paul said the central bank wants to reduce these so savings go to capital markets as well as to the banking sector. Lower deposit rates will also allow banks to lend more cheaply, which will also stimulate economic growth.
Rashid said another challenge for the bond market is poor liquidity in the secondary market. Both commercial banks and Bangladesh Bank have been trying to improve this. For example, global traders can now access the market via Bloomberg and Reuters terminals. More banks are now offering two-way quotes. Currency forwards on the taka are now available out to one year. There are no up-front taxes or onerous rules on repatriating capital.
“It’s a good time for portfolio investors who have an appetite for risk,” Rashid said.
The central bank is also working to digitize and automate the market, so that there is greater transparency. Citing the country’s positive experience with financial liberalisation in the 1990s, when growth rates rose and market volatility declined, Paul said, “We need further, careful liberalisation in order for Bangladesh to reach its growth potential.”