Special: Bangladesh Macroeconomic Outlook for 2014

This is a report I prepared for BRAC EPL Stock Brokerage. With special permission and by deleting some content I am reprinting the report here. Note that this is just a macroeconomic analysis and in no way gives any stock recommendation. Also, remember that macroeconomic conditions are dynamic and things might have changed from the date of publishing (Jan 15, 2014).

Bangladesh Macroeconomy, Frontier, Strategy, Stock MarketSummary of Report

We see 2014 to be very important in deciding the future of the country and politics could play a major role in that. Economic activity in terms of investment, credit growth, import etc is likely to be subdued at least till the first half of the year. On the bright side, the strong foreign exchange reserve minimizes the risk of a currency crisis, while relatively benign inflation will allow space for monetary stimulus. Furthermore recent developments in the political arena show that the worst case scenario is a low possibility as the opposition has called off strikes till further notice.

Despite a relatively mixed outlook in terms of economy, we do expect total corporate earnings of the listed universe to show growth after three consecutive down years (primarily due to financial sector earnings drop).

However, the 12M trailing P/E multiple of 18.2x indicates that some of this growth has already been discounted in the market.  A quicker resolution to the political stalemate will be an upside risk in our view. Things to observe carefully would be the 1. Political developments 2. Health of the banking sector and the 3. RMG sector which came under increased scrutiny in 2013


Asif Khan, CFA

Asif Khan is presently a Research Analyst (Financial Sector) for Exotix which is a frontier market focused investment bank. He has more than 6 years of work experience as equity analyst in both buy and sell side roles across Asian frontier markets. Asif is a CFA Charterholder and has a dual major in Finance & Economics from North South University.

2 thoughts on “Special: Bangladesh Macroeconomic Outlook for 2014

  1. Agree with you on most things, except the ‘benign’ inflation. Although i dont have any quantitative back up for my belief, but my qualitative views are:

    1. Inflation that we are seeing now is on the down side, for one thing a stable taka. Even a slight depreciation of Taka which is not unlikely down the road can make inflation worse. As it is Bangladesh Bank has used the word ‘accomodative’ in its MPS in a sense it really is still restrictive in its MPS with no rate cuts or cut of SLR/CRR.

    2. Listed company earnings specially the bank sector in my view have somehow already been discounted in market. U turn by Bangladesh Bank on the loan classification and provisioning rules (September, 2012 and directive and latest directives) was more a ‘political’ decision rather than an ‘economic’ one. In long run we can expect Bangladesh Bank will follow Basel 2 and 3 in making loan provisioning and classification dynamic based on the credit exposure of a lender.

    3. While we can be optimistic about exports of Bangladesh, remittance earnings may stagnate in the coming days due to slowdown in manpower export in labour markets. Additionally some of the labour markets are witnessing increased vigilance and deportation of illegal labour by the respective country authorities. This may put a pressure on remittance. Also there is a disincentive for remitters to remit more foreign exchange at a less favourable exchange rate. At some point Bangladesh Bank may favour some managed depreciation of Taka to encourage inflows if it does not raise the interest rates on Govt bonds, savings instruments etc.

    4. I think we should also consider the budgetary repurcussions of massive infrastructure projects like the Padma Bridge in the near horizon. While generally govt borrowing has been low, locally finance infrastructure projects like Padma Bridge can the drain the govt’s coffers and may lead to crowding out of ‘Private sector finance’ something that would not be conducive to bringing interest rates down a prime condition for industrial activity to pick up besides peace in the country.

    5. All in all i think inflation will remain a principal concern for Bangladesh economy in the times to come. India the big door neighbour is grappling with inflation something that percolates to us in the form of rising ‘onion’ prices etc. As food items imported from India form a significant portion of our CPI/RPI/WPI inflationary concerns will take to time. Already Reserve Bank of India has had to hike rates to contain inflationary concerns and keep INR stable.

    6. The rising wage rates in Bangladesh as proposed in recent times will reduce the competitive edge of Bangladeshi exporters in garments sector and will also create a ‘wage-wage-price’ spiral in BD economy.

  2. I completely agree about your view on inflation. In fact, after looking after the January 2014 inflation figures I am completely certain that BB cannot keep inflation within their target of 7% by any means. In fact I expect inflation to range between 8-9% which means a policy rate hike in the next monetary policy.

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