Bangladesh Annual Markets Roundup 2009

2009 may be marked as the year of struggle in the aftermath of the global financial crisis, a situation which the world did not experience since the Great Depression. The crisis so far did not impact Bangladesh economy severely because of its restrictive capital flow regulations. Thanks to double digit export growth, unexpectedly buoyant wage earner remittances from expatriate Bangladeshis across the world, lower capital machinery imports due to demand weakening abroad and lower commodity prices. Researchers do not need to spend a lot of time to find out the key factors for 2009 in Bangladesh economy which helped to avoid the shock from the global financial meltdown. We are talking about agriculture and remittances farmers & favourable weather conditions and expatriate workforce played pivotal roles in our economy during 2009. Bangladesh Financial Markets have seen the development possibility of a term market in resemblance to LIBOR, first ever onshore USD interest rate swap and the worlds first BDT Option.

Bangladesh Annual Markets Review offers an insight into Bangladesh Financial Markets and developments within the country. In this publication we tried to analyze the money, forex and stock market during this unusual year. We expect it to provide a timely and reliable source of information for our wider customer and reader base. Most importantly, we expect this edition will help all of us in determining the development and outlook for the new decade.

HSBC Global Markets team wishes all a very happy and prosperous 2010!

Local Money Market: awash with liquidity

The year began with Call money market trading mostly close to 10%. In early March, central bank raised its benchmark repo rate to 8.50% from 8.25% in an effort to implement its cautionary monetary policy. After remaining mostly around 7.50% to 9.50% for the first quarter, call market suddenly fell near zero, much like the US dollar. Central banks policy decision seemed to have reversed and it rejected all reverse repo bids starting the fall. Other factors, such as shrinkage of domestic credit and reduced government borrowing from the banking sector contributed to the free fall. Market seemed to be awash with liquidity and fund managers found little avenues to deploy the excess funds. Eventually the government security yields began a rapid decline. Meanwhile, the surplus FX added to the pressure as banks had little demand for it and had no option but to sell the surplus FX to the central bank which added to the local currency liquidity. For several months call money traded within a very slim band of 0.10% to 1.00% occasionally dropping to even 0.05%. Only prior to Muslim Eid-ul-Fitr festival a little rise in the rate was seen and it promptly dropped back down afterwards. As the fourth quarter rolled on, signs of inflation became a cause of concern and the central bank reissued short term (30-Day) BB Bills to mop up some excess liquidity. In November, central bank announced a rate cut of the benchmark repo and reverse repo rate from 8.5% and 6.5% to 4.5% and 2.5% effectively settling the market within that range for the rest of the year. Central Bank continued its previous years policy of applying pressure on banks to lower interest rate spreads, and a falling interest rate in the market forced banks to reduce both their double digit deposit rates and consequently their lending rates, effectively reducing the spread. MPS released during Jul09, emphasized on agriculture and SME credit and a liquid market seemed to be favourable towards these activities. Sharply falling government T-Bills and T-Bonds rates saw market more engaged in secondary trading and eventually credit expansion. The year also witnessed new strides towards the development of a benchmark interbank reference rate. With support from the central bank, BAFEDA took the initiative to introduce the Dhaka Interbank Offer Rates (DIBOR) similar to LIBOR in the UK. Although it is still in the primary stage with rates quoted up to 3 months, going forward, DIBOR should become the primary indicator of Bangladesh interest rates for the international community. Outlook: Bangladesh Bank using its monetary tools is likely to continue to apply pressure on banks to lower their spreads between deposit and lending rates. At the same time interest rates are likely to remain mostly around current ranges in the New Year. Call Money Rate: 2009
10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec09 09 09 09 09 09 09 09 09 09 09 09

Call Rate History: 2003-2009

Govt Securities Curve: Y-o-Y Comparison

14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 91days 182days 364days 5-yr 10-yr 15-yr 20-yr

2008

2009

Local Forex Market: what volatility?

Overall in 2009, the dollar gained marginally by 0.46%, beginning the year at 68.95 and closing at 69.27, most of the gain coming in the last two months. Strict regulatory supervision and intervention ensured very little volatility throughout the year that was full of uncertainty in the aftermath of the global financial meltdown and jitters about economic recovery. Towards the later part of the year, import of petroleum, fertilizer and scrap vessels created some demand for the dollar in an otherwise lackluster year when most banks only saw influx of dollars for which the only buyer was the central bank. While the other Asian currencies rebounded from the spectacular drop the year before, BDT was protected from appreciating in the interest of the remittance recipients and exporters. While freemarket economists may frown up on such a strategy, we would like to point out that during the tumultuous period of 2008, while other Asian economies such as India, Korea, SriLanka saw severe weakening (20-30%) of their currencies, BDT remained fairly resilient losing only 0.5%. At that time, while exporters were demanding forced depreciation of the BDT, it protected the importers and inflation. The apprehension and fear of negative remittance growth was proven wrong by the expatriate Bangladeshis, and a record amount of remittance boosted the countrys forex reserves. During the year, moderate export growth, declining import cost, and a record breaking inward remittance figure pushed the countrys forex reserves to double digits for the first time in history. It was quite unpredictable that our Forex reserve would grow by nearly 100% during the year from $5.35bn in Jan09 to $10.34bn to close out the year. Bangladesh Bank also revised scheduled banks net open position (NOP) limit twice this year to accommodate more FCY to be held by the banks. Bangladesh Bank also withdrew the restriction on FX Forwards. HSBC concluded worlds first ever BDT FX Option by combining a CALL and a PUT option to create a zero premium collar for its customer. Outlook: Moderate depreciation of the taka is envisaged for 2010 since it is unlikely that central bank will change its policy stance in what is expected to be the year of economic recovery of the west. USDBDT Wtd avg rate: 2009
69.30 69.20 69.10 69.00 68.90 68.80 Jan- Feb- Mar- Apr- May- Jun09 09 09 09 09 09 Jul09 Aug- Sep- Oct- Nov- Dec09 09 09 09 09

USDBDT History: 2003-2009

72.00 69.00 66.00 63.00 60.00 57.00 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

FX Reserves ($ bln): Rise and Shine

12.00 10.00 8.00 6.00 4.00 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec09 09 09 09 09 09 09 09 09 09 09 09

Stock Market: will the Bull Run higher?

Equity market witnessed almost 75% rise in its benchmark index during the year. During first quarter market was mostly quiet and a gradual correction took place. Investor confidence seemed to have returned ahead of the National fiscal budget announcement in June. After a brief lull in the third quarter, market seemed to take off, boosted by the listing of much awaited Grameen Phone. SEC actions throughout the year sent mixed signals to the investors which was dominated by banks flushed with surplus BDT liquidity. Changing of margin and holding rules seemed to have created some jitters among the investors. Towards the end of the year the proposal to bring all the share face value to BDT10.00 created a lot of noise and worries. Nonetheless, the robust move remained unfettered and market moved from strength to strength. This robust growth explains the reason behind the government thinking of raising $10 bln from equity market for new power projects. Foreign investment into our stock market was already low, but saw some growth in 2007 to 5.5% of market capitalization. In 2008, the year of world financial and credit crisis, this dropped to 2.6%, but being such a low number, Bangladesh stock market continued to rise in comparison to other stock markets around the globe. FDI into our equity market seemed to have dropped even further in 2009 (final data is yet unavailable), which local investors ignored thoroughly. Finally, the obvious question is are we seeing a bubble and is a burst coming? While, a correction in the new year is likely as a number of shares seemed to be overvalued, burst of a bubble is farfetched. And we base our call on several factors. First of all, the bullish move this year was mostly from the banking sector that was suffering from excess liquidity; in 2010, the excess liquidity may be deployed in industry, agriculture and SME loans, but interest rates are likely to remain in low single digits, which will keep the bank inclined to continue this high revenue activity. Secondly, while there were a number of IPOs in the market in 2009, there were no state owned enterprises that got listed. A number of these are in the pipeline; namely the three major former nationalized banks. This will boost the market if anything. Moreover, if the government is successful to raise money from the capital market for power and infrastructure projects, it is likely that we will see another Bull year in 2010. DSE Trend for 2009: DGEN Index
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09

Average Monthly Turnover

120,000 100,000 (B D T 'm ln ) 80,000 60,000 40,000 20,000 0 2002 2003 2004 2005 2006 2007 2008 2009

Market Cap vs DGEN

2000 1600 (BDT'bln) 1200 800 400 0 2002 2003 2004 2005 2006 2007 2008 2009
Market Cap (BDT 'bln) DGEN (RHS)

5000 4000 3000 2000 1000 0

Selected Economic Indicators

Inflation Trend (%)
8.00 6.00 4.00 2.00 0.00 Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct09 09 09 09 09 09 09 09 09 09

Wage Earner Remittances ($ mln)

1100 1000 900 800 700 600 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Import ($ mln)
2400 2200 2000 1800 1600 1400 1200 1000 Jan Feb Mar Apr May 2009 Jun 2008 Jul Aug Sep Oct

Export ($ mln)
1700 1500 1300 1100 900 700 500 Jan Feb Mar Apr May Jun 2009 Jul Aug Sep Oct

2008

GDP (BDT bln and %)

4000 6.80 6.60 3000 6.40 6.20 2000 6.00 1000 5.80 5.60 0 FY05 FY06 FY07 FY08 Growth (%) FY09 5.40

M2 Money Supply (BDT bln)

3200 3000 2800 2600 2400 Jan Feb Mar Apr May Jun Jul Aug Sep Oct

GDP (in BDT bln)

Year on Year: Comparison Table

Money Market
Call Rate Average Call Rate [Yr end] Repo Rate [Yr end] Reverse Repo Rate [Yr end] 2008 9.51% 9.50% 8.50% 6.50% 2009 4.97% 4.00% 4.50% 2.50%

Forex Market
USDBDT Average USDBDT [Yr end] USDBDT Range BDT Depreciation % Y-o-Y FCYBDT Market Turnover Kerb Rate [Yr end] 2008 68.5905 2009 69.0363

68.47-68.95 68.90-69.20 68.47-68.95 68.90-69.20 0.54% $3.9 bln 68.20 0.43% $5.2 bln 70.20

Treasury Bill Rate [Yr end] 28 Days 91 Days 182 Days 364 Days 7.49% 7.92% 8.16% 8.58% 2.49% 2.30% 3.54% 4.60%

Equity Market
2008 Closing DSE Index Turnover Total (BDT bln) Number of IPOs Market Cap (BDT bln) Market Cap as a % of GDP Highest Turnover in a day (BDT bln) Lowest Turnover in a day (BDT bln) 2795.33 657.96 12 1059.53 19.41% 5.91 0.74 2009 4519.35 1413.85 18 1869.54 30.40% 12.45 2.12

Treasury Bond Rate [Yr end] 5 Years 10 Years 15 Years 20 Years 10.60% 11.72% 12.14% 13.00% 7.80% 8.75% 8.69% 9.10%

Contributors
M Wahiduzzaman Head of Corporate Sales, Global Markets Bangladesh Contact: 880 2 8622989 Mail: mwzaman@hsbc.com.bd Jamal Y Zuberi Dealer Forex and Money Market, Global Markets Bangladesh Contact: 880 2 9660536 Ext 459 Mail: jamalyzuberi@hsbc.com.bd

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