BD institutions weak to weather unanticipated economic shocks

An international survey finds Bangladesh's institutional quality and business environment deficient in weathering potential economic shocks while assessing 25 frontier markets' potential vulnerabilities for the year 2018.

While identifying the areas of weakness in Bangladesh, one of the frontier nations, the Washington-based Institute of International Finance (IIF) found Bangladesh neither highly risky nor less.

Economists said institutions and business environment as well as asset valuation of Bangladesh remained a core area of criticisms for long.

They noted that many moves made by the government to overcome the lacking were yet to see any concrete success so far.

The IIF's latest analysis ranks Bangladesh and Pakistan relatively low in institutional quality and business environment out of its four key areas. Romania and Costa Rica ranked relatively high in the category.

The international organisation is of the opinion that robust institutions can help frontier-market (FM) countries to better weather unanticipated shocks.

It said: to capture how institutional quality and business environments vary across the FM25, we compare their relative rankings in widely-used measures of economic freedom, ease of doing business, and governance.

The IIF scorecard covers traditional indicators like financing needs and reserve adequacy while also considering whether asset valuation appears stretched and the robustness of the country's institutions.

It considers countries with relatively expensive valuation to be more exposed to changes in investor sentiment and thus considers relatively high asset valuation to be a point of vulnerability.

Looking at a wide range of valuation matrics, including trends in real effective exchange rates (REER), real interest rates, risk-adjusted currency returns, and equity ratios (both price/earnings and price/book), it suggests that valuations for Bangladeshi assets look particularly stretched Tunisian, Moroccan, and Bahraini assets also appeared on balance relatively more expensive.

However, Bangladesh, Dominican Republic, Ecuador, Croatia, Serbia, and El Salvador look more resilient on their financing needs, with most of these facing relatively lower levels of short-term external debt and relatively smaller current-account deficits.

The IIF said some FM countries, including Bangladesh, remain sensitive with changes in employment and growth rates of some gulf countries.

It noted that Jordan, Sri Lanka, Pakistan and Bangladesh have significant expatriate populations in the GCC countries. "So they likewise remain exposed to changes in GCC growth rates and employment policies."

Indeed, Saudi Arabia recently announced that to reduce unemployment among its citizens, it would ban foreign workers from 12 sectors starting in September last.

However, Bangladesh is in less risk of the countries with adequate reserves. Trinidad, Serbia, and Bangladesh rank relatively high in reserve adequacy, with Trinidad's reserves offering an important offset to its relatively high financing needs.

Dr Zahid Hussain, lead economist at the Dhaka office of the World Bank, told the FE that the government has enacted a law pertaining to "one-stop" service to overcome the problems facing the entrepreneurs.

"To my mind, this is challenging for Bangladesh to ensure a truly one-stop service overnight."

He said asset valuation is also challenging in Bangladesh as it lacks accountability and transparency.

"The government also established a watchdog body-Financial Reporting Council-and it will take time to get a cherished result."

Dr Ahsan H Mansur, executive director at the Policy Research Institute of Bangladesh, said the IIF is a highly prestigious organisation and its findings are always based on ground realities. The areas it identified are really a matter of concern for the country.

Citing the 'ease-of-doing-business' report, the economist said Bangladesh could tap huge benefit as frontier country if the problems could be addressed quickly.

In assessing scope of potential vulnerabilities, the IIF uses a simple scorecard framework to look at four types of risks: 1) Asset valuation 2) financing needs; 3) reserve adequacy; and 4) institutional quality and business environment.

It finds Tunisia, Pakistan, Vietnam, and Bahrain particularly vulnerable to potential economic and financial shocks.

It also found Croatia, Serbia, and Romania as relatively low-risk countries, thanks primarily to low financing needs and robust reserve holdings

The 25-FM markets are: Costa Rica, Croatia, Dominican Republic, Kazakhstan, Ecuador, Romania, El Salvador, Serbia, Jamaica, Trinidad & Tobago, Cote d I'voire, Bangladesh, Pakistan, Sri Lanka, Ghana, Vietnam, Kenya, Morocco, Tanzania, Bahrain, Tunisia, Jordan, Zambia, Kuwait and Oman.

The IIF has close to 450 members from 70 countries that include commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks.

[email protected]