Opinions
8 years ago

To market, to market - to buy bonds

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Bangladesh is a land of potential promise. Economically, the promise stems from having the record of one of the most stable growth rate over the past quarter century among the top-echelon performers: agricultural self-sufficiency has supplemented RMG (ready-made garment) exports to constantly post an annual 6.0 per cent growth rate or better. The "potential" component stems from not always finding investors to pick up on the growing list of project-needs: the gap typically stems from security fears, infrastructural absences or deficiencies, or energy insufficiencies, among others.
Several measures have constantly been taken to actualise the potential: bank interest rates have been lowered; a mammoth list of high-priority infrastructural projects has been initiated; and an equal flurry to fill energy gaps continues to keep our diplomats ever busy preparing agreement protocols.
Not as much attention has been paid its nascent bond market. Whereas falling bank interest rates encourage individuals and small- and medium-sized enterprises to invest in building a home or expand production, the bond market's typically higher interest rates appeal to investors, oftentimes large-scale investors, such as Bangladesh also needs to complete those infrastructural projects. Bonds can be issued by the government, post offices, banks, or other financial institutions, but each of these agencies can also purchase bonds from each other: pensions, for example, can be paid from bond-based funds; but the government can also borrow, as it is for the Padma Bridge, from similar funds called the sovereign wealth fund (SWF) against the likes of foreign exchange reserves.
Bond-determination typically begins with the local currency, then, depending on the strength, stability, and other resources that currency can stand upon, foreign currency-denominations constitute the next step in globalising the bond market. Embedded by our surging remittances and foreign exchange reserves, the Bangladesh government decided in 2013-4 to plunge into the dollar-denominated sovereign bond market. We do not have a choice but to tap into the huge external funds available for our equally huge developmental needs. Both the Wage Earner's Development Fund (WEDF) and U.S. Dollar Investment Bonds (USDIB) have been mobilising our expatriates and migrants for this purpose.
The global SWF industry is staggering in size and substance. Over $20 trillion is available here, deposited mostly by countries with huge commodity-export surpluses, either in SWF accounts or sovereign investment fund accounts. Abu Dhabi Investment Authority, Saudi Arabia's SAMA Foreign Holdings, Kuwait Investment Company, and Qatar Investment Authority, holding about $773 billion, $632 billion, $592 billion, and $256 billion, respectively, in 2015, rank in the top-ten holders' list. Yet, pension funds of advanced economies led that list in 2015 (information available from Sovereign Wealth Funds Institute): the U.S. Social Security Trust Funds holds over $28 trillion, Japan's Government Pension Investment Fund $1.15 trillion, Norway's Government Pension Fund $873 billion, South Korea's National Pension Service $455 billion, and the Dutch Stichting Pensioenfons ABP $440 billion, all making up the rest of the top-ten list.
As evident, there is a lot of money available and just as many opportunities for Bangladesh. On the one hand, with credibility in that market (for which the "promise" we hold that was discussed earlier plays hugely), there is no shortage to funding our dream projects: we have not defaulted financially anywhere; our governmental debt is only 20 per cent of gross domestic product (GDP), which is the lowest in South Asia and growing by a quarter each year; and our remittance inflows and RMG exports are not about to evaporate all too soon, meaning that we have a stable future shadow upon which we can borrow ad infinitum to implement whatever we need (infrastructural costs will demand over $100 billion, as was mentioned in the Bangladesh Investment Summit in Singapore in the first week of September, 2015).
On the other hand, since our emergent stock and bond markets are just too small to supply these funds (the former has a $36 billion current value and the latter $18 billion), we have no choice but to spread our wings into foreign bond markets. Fortunately for us, two other governmental decisions have widened the paved road to that goal: opening specialised export zones to foreign countries (11 of them), and joining China's Asian Infrastructure Investment Bank (AIIB), which will dip into the global SWF accounts heavily as it gets its act together. Minor intricacies remain from maximising our returns from the former (such as labour organisations when our government would prefer top-down welfare associations), but they constitute the right step towards thwarting that other ghost hauling our progress for investors: security concerns. About AIIB funds, Bangladesh leads the list of countries tapping them.
Our citizens also get exposed to another window of opportunity for their savings: a slightly higher returns than in banks; though in groups they can also purchase bonds for their own investment needs. These will not destabilise our banks, which are awash with cash anyway; though any small-scale investment through banks might be most propitious now with the stumbling interest rates.
Dr Imtiaz A Hussain is Professor, International Relations, formerly Universidad Iberoamericana, Mexico City.
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