The Bangladeshi business landscape finds itself in something of a conundrum. As inflation rates rise, and economic pressures cause the taka to consistently weaken against the dollar, the country sees a mass walkout of foreign investors from its stock exchange and the way forward looks bleak.
New infrastructure is being built, transport facilities are getting better, the literacy rate has climbed up and Bangladesh is posting stable GDP numbers each year. The country is raring to climb up to the coveted status of a developed nation in a few decades and the predictions are music to the ears. What then, could be the reason for this sharp downturn in the country’s upward growth trajectory?
No one can put a finger on the pulse of the problem. Some say it was the pandemic that left the country wanting more foreign investments, others say that the Russia-Ukraine war caused the country to pay higher import costs, tipping the current account scales against Bangladesh. Still, others complain of high energy costs and oil price hikes that have caused worldwide inflation, and the rest maintain that the artificially valued taka which desperately needs to be devalued in order to increase whatever exports we can, has finally pushed the Dhaka Stock Exchange (DSE) over the edge. The problem could be any of these or a culmination of all of the above, but the end result is that the country is seeing a mass exodus of foreign investors from Bangladesh, as they pull out of the DSE to take their precious money elsewhere.
Despite the organisation of road shows by the Bangladesh Securities and Exchange Commission (BSEC) in different countries to identify potential investors, highlight the existing investment opportunities to them, attract them to invest, and expedite the elimination of investment-related roadblocks, the foreign investment portfolio has not seen a lot of positive impacts. The DSE saw foreign investment worth BDT 871 crore pull out in the months of August and September last year. Market operators used the word “unprecedented” to describe the situation as the country’s stock market has never seen such an exit. The numbers are especially surprising as the BSEC imposed floor prices on all companies to prevent share prices from falling beyond a certain level.
2020 and 2021 had seen similar fates, with net sales of foreign investors increasing from BDT 2,606 crore in 2020 to BDT 2,648 crore in 2021. The sale-to-purchase ratio remains exceptionally weak and the country has not seen such dismal figures since 2010, the year with the highest net sales numbers until now. The country posted net sales figures of BDT 676.58 crore in 2010, which seems like quite a happy number, in retrospect.
The scenario over the years has not been the best for good stocks in the Dhaka and Chittagong markets either, with both suffering from an erosion of the markets. In the 10-month period ending in October, BRAC, one of the most profit-making listed banks in the country, saw a decline in its foreign stake from 37.88% to 34.10%, while small-cap companies had it worse. For some, foreign stakes fell to zero. ML Dyeing, for instance, lost its entire foreign investment, worth 19.52% in just four months, ending in October 2022. IDLC Finance claims that foreign shares of the DSE were fluctuating between 4.2% and 6.8% between 2015 and 2021. The sharp decline to 3.9% in June 2022 was alarming, to say the least.
GLOBAL CONDITIONS ARE VOLATILE AND IT MIGHT NOT BE IN THE BEST INTERESTS OF INVESTORS TO REMAIN IN HIGH-RISK MARKETS SUCH AS BANGLADESH. THE EXPERTS FEEL THAT IT IS ONLY LOGICAL THAT THEY WOULD CHOOSE TO TRANSFER THEIR FUNDS TO SAFER HAVENS.
Market experts have their reasonings. They feel that the overseas investors may have exited from Bangladesh because developed countries such as the United States of America raised their interest rates for both treasury and private bonds, to ease inflationary pressures that had touched about 8.6% – their highest in four decades. The US Federal Reserve raised its main interest rate by 75 basis points recently – the biggest increase since 1994 – to a range of 1.5% to 1.75%. The 10-year US Treasury note, which yielded about 1.5% even until 2021, gradually increased to 4% by October 2022.
Simultaneously, unfortunately, the taka weakened from BDT 85.8 to BDT 106.90 in the span of one year. The lucrative interest rates – especially as the drastic devaluation of the taka would translate into lower income for overseas investors – could easily be the reason they pulled out of Bangladesh and decided to take their money to low-risk, high-profit-yielding investments. “There are no conversion risks in the investments made in their own countries,” said an official of the LankaBangla Securities.
Stock market investors are embroiled in a number of different issues, not limited to solely the devaluation of the taka against the dollar. They also continue to grapple with inflation. “Risk-averse investors have been on a selling spree as the inflation hit an eight-year high of 7.42% in May (2022),” said International Leasing Securities. There are also growing concerns over the national debt and the global supply chain disruptions caused by the continuing war between the two European countries, Russia and Ukraine. Global conditions are volatile and it might not be in the best interests of investors to remain in high-risk markets such as Bangladesh. The experts feel that it is only logical that they would choose to transfer their funds to safer havens.
Even if foreign stock sales slowed down once shares stuck to floor prices, insiders have reasons to believe that overseas investors are never too comfortable injecting fresh funds into the capital market once price movement restrictions are in place. These investors assess the fundamentals of a company before putting their money on them, and this in turn helps the market to determine stock prices based on their strengths. They do this with the help of local research institutes, inciting better stock analysis and their performance in the market. When frontier markets are unable to provide enough institutional capacity to handle aggressive foreign sales, which was the case in this situation, particularly due to the closing down of foreign funds from frontier markets during the pandemic, mounting selling pressures force the market to move towards a rapid decline.
Whatever their reasons, the existing investors sure have left the Dhaka bourse in a pickle. The net foreign investment has been red for the past four consecutive years and concerning allegations such as those of financial document fabrication, share price manipulation and approval of fundamentally weak initial public offerings have not helped matters.
While experts have a sense of foreboding regarding the dire situation, now is the time to ask some tough questions. One such question is, are the investors losing faith in the Bangladesh stock market? The answer may be nuanced but one worth unravelling. Periods of high interest in the world have never boded well for stock markets. There is the lure of better earnings in other sectors and people are tempted to pull out of volatile investments. Add to that the steep devaluation of the Bangladeshi taka, in order to fix the skewed Forex reserve dilemma of the country, caused by dearer imports and not nearly enough incoming remittance. Investors would think to pull out in a hurry before they get even smaller numbers of dollars for their redeemed takas. This is simple economics, even if disappointing.
The way forward is murky, at best. Experts feel that the widening trade deficit dollar crisis in the market will inadvertently lead to further devaluation of the currency and finance minister AHM Mustafa Kamal’s statement that the exchange rate of taka against the US dollar will be kept “competitive”, hints at the same notion. The finance minister also noted the challenges the government will face, in order to keep foreign exchange reserves stable in the midst of global price fluctuations.
Of late, a ray of hope, however tiny, can be seen in the stock markets of the country as fresh investments start to come in. The Dhaka bourse is almost at its lowest level, considering the long episodes of price erosion not too long ago. A senior official of LankaBangla Securities has been quoted to say that foreign investors try to “adjust their portfolios when the market is downward” and that their clients have recently started to place fresh orders to buy. Ahsanur Rahman, chief executive of BRAC Stock Brokerage feels that overseas investors have assumed safe positions to observe the market before making a fresh move. There is a feeling that once companies come to terms with the inflation rates, the profitability of shares may increase, stabilising the market once more. At this point, it seems like we must take whatever we get, at least until the markets find back their footing.