NDB Capital says the country needs to ensure adequate participation from all classes of investors in order to sustain its healthy growth trajectory
|Feb12,2015:Bangladesh, considered by many to be the rising star of South Asia, has shown resilient macro-economic performance even during the global economic crises of the recent past. Unlike comparable developing countries, it has been able to impress with its notable improvements in various social and human development indicators simultaneously.|
In fact, it has been successfully converting its curse of being the most densely populated economy into a blessing by performing continuously in human resource development, woman empowerment and living standard improvements. This has made the country a unique proposition as a model for growth.
One hugely important outcome of Bangladesh’s unique growth pattern is that it has been successfully shaping the domestic market as a robust shield against various external economic shocks. How so? Dissimilar to its regional counterparts, the economic growth of Bangladesh has not expanded the
economic divide; rather the effects of the growth has been distributed somewhat evenly both in monetary and non-monetary forms. The result is a rising relative share of the middle-income segment along with a growing per capita income. Consequently, not only the purchasing power of people is increasing, the consumer base is expanding too. This strengthening domestic demand has been one big contributing factor in keeping the economy afloat even during rainy days.
Now, add the growth-conducive age composition of the population — the majority is concentrated within the “working age” category and the relative share of this age category is on the rise. According to World Bank, the working age (15-64 years) population has reached 64.2% from 53.9% in 12 years from 1990 to 2012. Also, within the same time period, the dependent population (below 15 or above 64 years) as a percentage of working age population has dropped considerably from 85% to 54.53%.
|Given the country’s labour costs already being one of the lowest globally, this growing labour force and declining dependent population percentage guarantees persistent labour cost competitiveness in various labour intensive sectors.
So, there can be no denying the fact that Bangladesh is well on track to become an economic power house in the South Asian region. However, is Bangladesh ready to step on to the gas and go the distance? It’s been proven time and again that after a certain stage, infrastructure development coupled with a strong capital market and financial sector is essential for sustainable growth. Severe infrastructural inadequacies have typified Bangladesh over the years.
According to the World Bank, Bangladesh will have to spend $7.4 billion to $10 billion a year until 2020 to build sufficient infrastructure for sustainable growth. The investment to GDP ratio, which has been hovering around the 25% mark for a long time, must be improved to attain the targeted 8% GDP growth rate.The government has been keen on overcoming the deficiencies as evidenced by its undertaking of several huge projects aimed at wide scale infrastructure development in the last few years.
But, it is a fact that only government initiatives are not enough for rapid infrastructural transformation — contribution from the private sector is essential in this regard. And presence of a well-functioning, liquid and developed capital market together with a robust financial sector integrates this process.
Considering the commonality of emerging markets, it’s no surprise that Bangladesh’s capital market has historically been extremely volatile. It went through two huge collapses within a span of only about 13 years — once in 1996 and then again in 2010
Investor confidence had been severely hurt following those debacles. In fact, the market has not yet fully recovered after the 2010 downfall.
One of the primary contributing factors behind this excessively long recovery period has to be the acute lack of diversification options in the market. Investors simply don’t have enough options to diversify or hedge their risks by investing in different asset classes. Only plain vanilla equity securities are traded in the secondary market. When referring to the capital market, most people mean trading common stocks in the secondary market. Surprisingly, the market for fixed income securities is effectively non-existent. Only a handful of corporate debentures or bonds are listed, but liquidity is literally zero. Under these circumstances, investors are left with few choices in terms of asset class. And hence, the slow pace of recovery in investor confidence.
Even with such huge growth prospects for the economy, the capital market only constitutes less than 3% of the GDP. Even though the major role of capital markets is to provide a means of raising capital, most of the financing needs of businesses and government projects are borne by the banking sector.
From 2010 to 2013, for every 100 Taka of funds raised from the banking sector, only 1 Taka was raised from the capital market. This clearly depicts the fact that businesses have not used the capital market enough. As a result, whatever money was invested in the market by investors in the hope of high returns basically contributed to creating market bubbles instead of providing capital to businesses. Consequently, the market crashed with too much money chasing a limited number of stocks.
This leads to two key observations — firstly, different classes of investment products need to be brought to the market to address investors’ need for diversification and risk hedging. A broader array of security classes will enable the investors to tailor their portfolios to their specific risk-return profiles. This, in turn, will attract more investors and the risk reduction potential will speed up the re-establishment of investor confidence in the market. Also, a wider range of asset classes will draw more foreign investment into the capital market.
Secondly, businesses should be driven towards the capital market to meet their capital needs. On one side, this will stop the formation of bubbles during bullish times and on the other side, it will enable the capital market to farther accelerate the economic development by channeling excess funds to businesses which require new capital. Opening up the secondary market to both debt and equity products is essential in this regard.
|NDB Capital Limited, a subsidiary of the famed NDB Bank of Sri Lanka, has been playing an instrumental role in bringing about this desired change in the capital market of Bangladesh through its innovative investment banking activities. The investment bank has been operating in Bangladesh since 2009. In the year 2013 alone, it has raised about BDT 10 billion for its clients in the form of both debt and equity securities. What sets NDB Capital apart from its competition is its strategy to introduce innovatively structured products to the capital market while adhering to strong corporate governance and ethical standards. By closely scrutinising the existing legal and regulatory environment, market and macro-economic scenario, business characteristics and specific requirements of the client, the investment bank formulates an optimised and customised solution on a case-by-case basis.
Traditionally, majority of the investment banks in Bangladesh have been operating with a very narrow focus on only a few plain vanilla products. NDB Capital has been trying to break this trend.
Besides introducing a convertible preference share issue to the market, the investment bank successfully managed issuance of the first-ever convertible coupon bond with an embedded put option in 2013. It also facilitated foreign investment in Bangladesh by offering a full spectrum of investment banking services. NDB Capital took initiatives to build awareness about shariah compliant products in the market to address the growing appetite for alternative investment vehicles.
Moreover, it is planning to introduce the first ever revolving commercial paper in the Bangladesh market. The significance of the role being played by NDB Capital in redesigning the local market has been reinforced through its achievements of globally reputed recognitions.
In order to sustain its healthy growth trajectory, Bangladesh needs to ensure adequate participation from all classes of investors — the government, institutions, general public and foreign investors. For this, a well-functioning capital market and strong investor confidence is necessary.
Investors need to be offered flexibility and diversity in their investment options to reduce the risks. Equally important, the private sector must be made aware of the various sources and strategies of gaining flexibility while simultaneously minimising the cost of funds. In this regard, investment banks have a key responsibility. Also, the onus is on them to bring together the interested global investors and local industries through innovative risk management and risk mitigation.
A large part of the development of Bangladesh’s capital market depends on how well they can perform this role of creating value on both sides of the continuum- the investors and the investees. NDB Capital Limited, with its innovative strategic focus and a vision to initiate positive change, has been doing exactly that.