Bangladesh has a good story to tell foreign investors, but the lack of a sovereign bond is preventing the country from putting itself on the map.
Its capital markets are open to both inflows and outflows. There are no restrictions on repatriating capital or dividends. The taka is stable, government debt is low, its global credit ratings are stable, and the local-currency bond market offers attractive yields: 7.2% for the government two-year bond and 8.4% for the 10-year.
But these markets are also small. The bond market is only $18 billion, or about 10% of the country’s GDP, and there is virtually no secondary market. The stock market’s capitalisation is $36 billion, bigger than Sri Lanka’s but smaller than the $55 billion Ho Chi Minh Stock Exchange. The Dhaka bourse lacks breadth (only 300 of the 3,000 registered onshore companies are listed), depth (of which only five are valued at more than Tk1 billion, or $12.7 million) and liquidity.
A US dollar sovereign bond offering would change that by giving foreign investors liquid securities tradable in size. It would also set a benchmark to help other borrowers tap international debt, from both the private sector and from public institutions financing infrastructure projects. In short, it would mark Bangladesh’s joining global capital markets.
Bangladesh’s peers in South Asia and among frontier markets have issued sovereign bonds, for example Sri Lanka, Pakistan, Vietnam and Nigeria. Even Myanmar’s government is said to be keen on obtaining a global credit rating with a view to eventually tap the markets.
Why not Bangladesh too? It boasts 15 years of uninterrupted GDP expansion of 6%-plus across an economy of 160 million people, and its business and financial leaders think it can raise growth rates to 8% to 10%. Its population is not only big: with an average age of just 24 years, it's also young, and experiencing the stirrings of consumerism. Bangladesh weathered the 2008 global financial crisis and is untroubled by the current bout of emerging-market selling.
Ready, set, procrastinate
Bankers have been pitching Dhaka on the idea for years. Officials at Bangladesh Bank (the central bank) and the Ministry of Finance continually affirm they are considering the idea. But these two institutions, and the prime minister whom they serve, Sheikh Hasina, remain reticent.
According to bankers, these government bodies can’t decide how to use the proceeds. They haven’t convinced themselves that the best time to issue bonds is when it is most affordable, rather than because there is a specific need for the cash.
Of course, the proceeds do need a use, and Bangladesh has a crushing need to finance infrastructure, from roads and ports to power generation and water treatment.
The government is said to fear besmirching its clean record of repaying multilateral loans, and of becoming beholden to foreign capitalists. There is also said to be complacency: with the country’s growth story ticking along nicely, Dhaka would prefer to generate capital internally. The government’s debt-to-GDP ratio is a miniscule 20%, which ministers consider a badge of honour.
This conservatism is no longer serving the country so well, however. The government’s office for private-public partnerships has identified $14 billion worth of projects already under development. Ask bankers and corporate leaders what's required, and the money needed to meet all of the country’s needs stretches into endless amounts. Bankers argue therefore the country could at least issue quasi-sovereign project bonds.
These public works may indeed need financing, but bonds may not be the best option, at least not for the moment. Syed Afsor Uddin, the person in charge of the prime minister’s office for PPP planning, told FinanceAsia that project bonds won’t fly in the first six or seven years of a project because the markets lack confidence in its feasibility or the government’s ability to stick to agreements around tariffs.
He said early stages are best financed through loans from commercial banks and from multilateral agencies. “We’ll need to work on project bonds for the later stages,” he said, noting his office is trying to establish track record with regard to specific parts of a project, such as projections about usage of a piece of infrastructure.
But once the country reaches the point where it does want to issue project bonds, it will find that challenging without a sovereign benchmark. That suggests the government’s debut on the international stage can’t be delayed much longer.