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Bangladesh usually attracts attention for the wrong reasons. Too often the country appears in news headlines for its natural or man-made disasters, or else it is dismissed as a source of employment for NGOs or cheap labour for the garment industry.
Yet, as long ago as 2005, Goldman Sachs named Bangladesh as one of its “Next 11” countries, which also included South Korea and Indonesia, for its promising investment and growth outlook. And the Japan Bank for International Cooperation ranked the country as the 16th most attractive investment destination in 2011.
Indeed, Bangladesh has enjoyed a decade of sustained improvement in its macroeconomic indicators, as Fazle Kabir, Bangladesh’s finance secretary, told about 300 delegates at the inaugural AsianInvestor and FinanceAsia Bangladesh investment summit in Singapore in December.
After decades of hobbling along at an average annual gross domestic product growth rate of 2%, this country of 160 million has enjoyed about 10 years’ worth of steady, impressive growth; its economy has grown by 6.2% per annum for the past five years despite the global financial crisis. In particular, per capita income has more than doubled to more than $800 and poverty levels have declined: the poor once accounted for more than 50% of the population, but only 31% today.
Social metrics such as life expectancy, infant mortality, literacy and fertility have all improved during the past decade and in many cases are better than in India and Pakistan, said Kabir.
A youthful and flexible population sustains the vigour of all sectors of the economy: today 61% of the population is of working age, and the median age is 23. Then main growth engines are remittances and the garments industry, which makes up 75% of exports. But, to maintain this promising trajectory, the country needs investment.
Bangladesh Bank, the country’s central bank, is now reviewing its Foreign Exchange Act with the intention of liberalising the way the country deals with foreign capital, said Hassan Zaman, chief economist at the central bank.
“We are asking ourselves: `Where do we want to go, how integrated do we want to be with the world’s financial markets, during the next 10 to 20 years?’” he said. But, full liberalisation is unlikely to be imminent as Bangladesh Bank remains committed to managing the country’s balance of payments, which will mean using capital controls to deal with domestic inflation and ensure healthy foreign reserves.
The government is also considering issuing its first international bonds in order to create a yield curve to help future corporate borrowers and to advertise the country’s prospects to international investors.
Kabir highlighted a wide range of sectors in which Bangladesh is keen to attract long-term investment and where there are prospects for strong returns.
These include familiar areas such as infrastructure — communication, transport, power and oil and gas — textiles, leather goods, pharmaceuticals and shipbuilding. Indeed, the country’s entrepreneurs have created exports in goods and services that are worth $24 billion annually.
In addition, the country has enjoyed a boom in telecommunication equipment manufacturing and infocom services, and has attracted Japan’s Honda to start joint production of automobiles.
Some firms are now providing access to foreign investors, with a range of options including private equity, traditional active portfolio investment and exchange-traded products.
Brummer & Partners Asset Management Bangladesh has been running a $100 million private equity fund for three years that focuses on a domestically focused range of sectors from retail to healthcare to manufacturing to export. “We are sector-agnostic,” said Brummer CEO Khalid Quadir.
The asset manager expects to exit deals after five years or more, typically via public listing, and hence has not yet executed any exits. Typical ticket size is $5 million to $20 million, and investors include multinational financial institutions, corporate pension funds, wealthy individuals and family offices.
There are certainly challenges, observed Quadir, who pointed to the difficulty of “what to leave on the table”, both in terms of capital and in terms of the level of corporate governance. For example, “the way a family had been doing business can’t usually be sustained”, he says.
“We provide advice on governance through our international network of expertise,” he added. Moreover, Brummer acts as an active shareholder on the board, but it doesn’t take an operational role and always holds a minority stake.
Portfolio investment is another option. It is perhaps easier mechanically, but restricted by insufficient stock market capitalisation.
Yet, “access to the markets is straightforward”, insisted Christian Forthuber, managing director at SwissPro. His Dhaka-based investment advisory firm is set to launch a pioneering Ucits-compliant Bangladesh equity fund that will target European clients.
He emphasised the importance of good corporate governance and building relationships, and his fund will aim to earn returns from long-term compound growth. One-third of the fund’s performance fee will be allocated automatically to social projects in Bangladesh.
“We did a lot of research two years ago and found there wasn’t a product like this out there — foreigners couldn’t access the market,” said Forthuber. “We need to follow stocks very closely, that’s why we are based in Dhaka,” he added.
He argued that there is sufficient free-float in the markets and plenty of liquidity to make investment worthwhile for overseas investors.
There are currently 513 securities listed on the Dhaka and Chittagong stock exchanges with a capitalisation of $29 billion, including 240 equities and 41 mutual funds; the rest are treasury or corporate bonds. Trading is conducted electronically on the exchanges and sale proceeds are freely remittable abroad. The market also has low correlation with the S&P 500 and the Euro Stoxx 50.
The benchmark DGEN index trades on a similar price-earnings multiple as Nasdaq and Sensex, but its market capitalisation of 21% of GDP is much lower than both — 104% and 55%, respectively.
According to Reaz Islam, chief executive of LR Bangladesh Asset Management, the DGEN index has returned 12.2% since 1990, compared with a 10.1% return on Nasdaq, 13.3% on India’s Sensex and 10.4% on Vietnam’s VN-Index. Some sectors, notably financial institutions, fuel and power, ceramics and engineering have performed particularly well during the past six years, posting annual growth of between 44% and 49%.
Clearly, there is room for the market to grow in size and variety. The country’s financial infrastructure remains immature: there is no secondary bond market, and no industry around market making or price discovery for debt or equity. There aren’t any derivatives or commodities trading either.
Alternatively, investors can gain exposure to the country through a Ucits-compliant exchange-traded fund launched by Deutsche Bank in November 2011. The US-dollar denominated db X-trackers MSCI Bangladesh IM Index ETF follows an index with 64 constituents, mostly financial stocks.
Nevertheless, demand is growing due to a rising number of fund managers in Europe looking to access frontier markets to boost returns and diversify portfolios, said Montanari.
Another approach — pioneered by Dhaka-based RSA Capital — is microfinance securitisation. “Microfinance has scale in Bangladesh,” said Sameer Ahmad, founder and CEO of RSA, noting that the 150 million-strong nation is one of the few countries where this is actually the case.
The vehicle has a $180 million asset pool from 4.5 million loans over a six-year cycle, but again, the main issue it faces is lack of liquidity. A secondary loans market simply doesn’t exist, and there’s no benchmark or price discovery for it, said Ahmad, although financial institutions in Bangladesh are working to remedy that. Over the next few years the problem is likely to be addressed.
Clearly, there is a nascent industry evolving for foreign investors to participate in. But, it is equally clear that the country has priorities.
In particular, infrastructure financing is essential and presents a huge challenge.
Bangladesh requires at least $35 billion of infrastructure investment over the next five years, said Iftakharul Islam, managing director at Asian Tigers Capital Partners.
Islam argued that foreign investment was not so much needed in domestic stocks, but should be channelled into “long-term sustainable markets” such as infrastructure. And the bigger privately owned banks, especially foreign firms, had a responsibility to work with international players to do what they can to encourage more FDI.
Bangladesh Bank recently took steps to incentivise banks to move into areas such as infrastructure financing. Yet, financial firms still lack sufficient resources, both from a human resources and technology point of view. Consolidation might help.
The central bank’s Zaman also wants to attract more institutions to facilitate foreign direct investment, including Singaporean banks that have set up in countries neighbouring Bangladesh. “We don’t really see that so much here yet,” he said.
Zaman pointed out that there were no barriers to entry as long as banks meet “fit and proper” requirements.
Regulators will carry out rigorous due diligence, but welcome foreign banks seeking to put operations on the ground, he said, adding there was plenty of room for more competition.
At the AsianInvestor and FinanceAsia conference, James McCabe, CEO at Standard Chartered in Bangladesh, said the central bank was doing a “fantastic job” improving the regulatory framework for banks and upgrading the quality of the system itself, reflecting a view from many other speakers.
An alignment of governmental and private business interests can only help attract international investment, and give a further boost to Bangladesh’s inclusive growth trajectory. Yet, “inclusion” of all sectors in the country is essential, so policy will be measured and circumspect.
This story first appeared in the December 2012/January 2013 issue of FinanceAsia magazine
