With 5%-plus economic growth for 16 consecutive years, Bangladesh has easily been one of the best investment stories to tell.
However, that stellar growth has never been matched by the same levels of foreign investment – not just in terms portfolio capital but also in terms of foreign direct investment. Because despite last year's record haul, FDI in Bangladesh as a percentage of its gross fixed capital formation remains well below the average for South Asia as a whole, let alone for developing countries generally.
A Bangladeshi sovereign bond could help change that.
While Dhaka can put forward various measures to attract foreign investment in the long run, such an offering may be the quickest way to raise the country’s profile among international investors.
The South Asian nation has all the prerequisites for a sovereign bond sale in international markets – aside from its robust economic growth, it also benefits from a modest government debt burden and solid foreign exchange reserves relative to its imports.
Bangladesh also has a stable credit profile. Global rating agencies Standard and Poor’s, Fitch and Moody’s have kept the country's BB-/BB-/Ba3 rating, as well as its stable outlook, unchanged for at least five years.
Some frontier markets with weaker credit and economic profiles have already found success with US dollar sovereign bond issues.
In fact, fellow South Asian Sri Lanka (B/B/B2), despite having a credit rating two notches below Bangladesh's, has tapped international debt 17 times since its inaugural sovereign bond issue in 2007.
Even B-/B-/Caa1 rated Mongolia managed to pull off two offshore bond sales totaling $1.4 billion in 2017, a couple of months after it sought a $5.5 billion economic bailout from the IMF.
While Dhaka has been mulling a debut sovereign bond since 2013, there is a general sense among the country's top financial officials that there is no urgent need to raise capital, a source close to the Bangladeshi government told FinanceAsia.
Bangladesh’s financial leaders, including former finance minister Abul Maal Abdul Muhith, is particularly concerned that a sizable sovereign bond sale will increase the nation’s foreign debt burden and put pressure on its fiscal prudence. The country’s 27.9% debt-to-GDP ratio is currently among the lowest in the world.
SETTING A BENCHMARK
As FinanceAsia has pointed out before, government officials generally view the absence of a sovereign bond as a badge of honour.
Nonetheless, a sovereign debt offering would establish a much needed benchmark for local companies for accessing offshore dollar funding.
And that would help to transform how these companies finance themselves as they have historically had to rely on bank loans because the local bond market barely functions, with just three corporate bonds issued to date and almost zero liquidity.
Such a move would also allow foreign investors to capture Bangladesh’s growth story without having to invest directly in local companies or projects, which is often subject to stricter foreign investment restrictions and ownership limits.
Sri Lanka and Mongolia are good examples of how setting up a benchmark offshore yield curve can spur dollar bond offerings by local companies.
Sri Lankan firms including Bank of Ceylon, National Savings Bank and SriLankan Airlines have raised nearly $2.4 billion in US dollar bonds since the sovereign's debut in 2007. Mongolian companies like Trade & Development Bank of Mongolia, Mongolian Airline and Mongolian Mortgage Corporation, similarly, have raised $2.3 billion – more than twice the market capitalisation of the local stock exchange – since Ulaanbaatar made its own debut in 2012.
And for Dhaka there is perhaps no better window than now to make its debut on the international stage now that foreign investors are actively seeking to gain exposure to the Bangladeshi market. The global hunger for investment yield is also relentless.
Last year, Bangladesh's second-largest cigarette maker, United Dhaka Tobacco, was acquired by Japan Tobacco for $1.5 billion in the country’s largest-ever corporate deal. China's Shanghai and Shenzhen stock exchanges bought a 25% stake in the Dhaka Stock Exchange, while electronics payment giant Ant Financial also took a 20% stake in financial services provide bKash.
Mustafa Kamal, Bangladesh’s incumbent finance minister who took office in January, is believed to be more receptive to the idea of taking the country on its first outing to international bond markets.
Should Bangladesh take itself to the international stage, it will be the third frontier Asian credit out there and a good alternative to financially-strained Sri Lanka and Mongolia for fixed income investors.