Bangladesh’s stock market reeled on the $100 million cyber-theft from the central bank resulting in the resignation of long-serving governor Atiur Rahman, as other South Asia MSCI components Pakistan and Sri Lanka were down 5% and 10%, respectively, through February. Two deputies were also removed for failing to take action after the breach was spotted, as the Finance Minister tried to assign partial blame to the New York Federal Reserve for fund release.
The incident came at a delicate time for the three countries in various stages of IMF adjustment programs, internal political violence, and external terrorism. Foreign investors acknowledge economic stabilization progress and low labor cost competitive advantage, but remain wary of lingering banking sector and governance lapses illustrated by the spectacular heist likely to cap market performance throughout this year.
Bangladesh just exited a Fund arrangement with mixed results, according to its February Article IV report. It cited 6% economic growth on headline inflation at the same number, international reserve buildup to $25 billion for six months imports, and a steady public debt ratio at 40% of GDP. However tax revenue and state bank cleanup lagged, and tensions endure between the main two political leaders aggravated by a war crimes tribunal convicting Islamic party figures of abuses. Infrastructure and regulation are “crippling” and private credit expansion, although in double digits, has slumped from its long-term trend.
Garment exports slowed in fiscal year 2015 with industry restructuring and lower foreign demand, and tax collection is poor even for low-income countries at just over 10% of GDP, leaving a chronic budget gap. The review criticizes weak bank balance sheets and outright scams, with non-performing loans at one-fifth the total.
Executives have been replaced at the worst-performing government institutions, but regulators do not enforce of Basel III standards being phased in or auto and mortgage exposure limits. Banks retain residual holdings in the equity market that were to be severed after the 2012 crash, and lack legal and practical tools for loan recovery. Both industrial and agricultural clients are at further risk from climate change which has already sparked natural disasters, and borrowing for clean energy transfer and land and facility adaptation should be priorities, the IMF advised.
Pakistan on China road
Pakistan has received $5 billion to date from its Fund program that expires in September, and China outlined $45 billion in power and infrastructure projects under the “One Belt, One Road” scheme in the coming years.
Prime Minister Nawaz Sharif has reduced the severity of daily business and household electricity cuts, although distribution companies continue to operate with heavy losses as state firm customers accumulate arrears. He has given the military freer rein to crack down on terrorism at the same time his party has distanced itself from conservative clerics to promote women’s rights, partially due to daughter Maryam’s influence as a possible successor.
GDP growth is estimated at 4% this fiscal year, and the current account is almost in balance on lower oil import costs. However, foreign direct investment fell by half and remittances increased by only single digits last year, and reserve coverage is precarious at less than four months imports.
In the banking sector, government borrowing continues to crowd out the private sector, with less than 10% of small and mid-size firms with access, according to official surveys. Monetary policy may be too loose after interest rate drops, and the central bank should move to inflation targeting, the IMF recommended. The privatization timetable through stock market sales has also slipped, although state-owned airline, insurance and steel listings are slated by year-end.
Sri Lanka reserves down
Sri Lanka, despite 6% economic growth post-civil war from agricultural exports, reconstruction and tourism and regularly oversubscribed external sovereign bonds has returned to Fund assistance. Foreign reserves are down to $6 billion, barely enough to cover 2016 credit repayment and the current account deficit after the central bank abandoned currency defense and allowed 10% depreciation against the dollar last year. Fitch Ratings just downgraded the country to “B” as the sub-region maintains limited success in repelling attacks on debt and financial system discipline.
Gary N. Kleiman is an emerging markets specialist who runs Kleiman International in Washington, D.C.