JASIM UDDIN HARON |
September 05, 2021, 8:15 a.m.
05, 2021, 8:24 a.m.
Private companies in Bangladesh could feel economic pressure from a backlash as the US Fed prepares to squeeze spending support in a pandemic as part of a remedy that could cause market disruption.
Some leading Bangladesh economists have warned that such a reduction could trigger a spike in global dollar borrowing costs, as in market tantrums.
They think it is a good time for the authorities to sensitize the financial sector to avoid any big problems.
Dr Ahsan H. Mansur, Executive Director of the Bangladesh Policy Research Institute (PRI), said: “Corporate borrowing could be negatively affected due to the expected reduction.”
Lenders may not transfer funds to companies if taper tantrum shows up in major global central banks.
The phrase taper tantrum describes the surge in 2013 in US Treasury yields that resulted from the Federal Reserve’s (Fed) announcement of a future reduction in its quantitative easing policy.
The Fed has announced that it will reduce the pace of its purchases of Treasuries, intended to reduce the amount of money it is pumping into the economy. The rise in bond yields that followed in response to the announcement was labeled tantrum-typing in the financial media.
Meanwhile, Bangladesh private sector borrowing from external sources has increased lately as it is much cheaper than local money market funds. The outstanding amount at the end of March was $ 16.2 billion, up $ 1.4 billion from December 2020.
They borrow through financial products, namely buyer’s credit, deferred payment and back-to-back letter of credit.
PRI’s executive director Dr Mansur said the capital market could be affected and many foreign investors could avoid risky securities if they are expensive to finance.
But, he said, remittances could experience a drastic drop, which already fell nearly 28% last July.
“In my opinion, overall remittances will go down. “
He said that remittances have many breakdowns. Some are real repatriation currencies for hard-earned Bangladeshi expatriates. However, a part contains foreign currency sent to Bangladesh for higher returns.
The main impact will be felt at a time when travel resumes.
“We all need foreign currency for travel and we collect it in the market,” said the former IMF executive.
Local companies that borrow from foreign sources say borrowing will be expensive after the cut.
Aameir Alihussain, managing director of the country’s largest rod production company, BSRM — said, “The reduction will make foreign borrowing expensive.
It will happen slowly, he said, adding: “If it gets higher than the local part, we will borrow from local sources.”
Dr Zahid Hussain, former chief economist at the World Bank, told FE it has yet to start. The Fed is forecasting this in the wake of rising inflation in the US market, which now hovers around 4.0%.
He said, however, that the government could avoid its risk because Bangladesh’s central bank has adequate foreign exchange reserves.
“The government has already received $ 1.45 billion distributed by the IMF according to the voting shares of Bangladesh in one of the Bretton Woods institutions.”
The International Monetary Fund (IMF) on August 23 created a fund worth $ 650 billion in SDRs, which gives member states the right to access the dollar at virtually no cost without an IMF program.
Dr Hussain noted that the government has a very limited presence in the international market. There is an IFC “Bangla” bond listed on the London Stock Exchange for the local food conglomerate PRAN.
He thinks even the central bank could earn interest because the Fed’s interest will increase.
Dr M. Masrur Reaz, Chairman of the Policy Exchange of Bangladesh, a newly formed Bangladesh think tank, said: “The reduction will take place shortly as the US economy is rebounding.
Dr Reaz said this would affect certain sectors to a greater or lesser extent, including the capital market.
He believes this will take place for a period of a year or more when the US Fed redeems its bonds and other securities.
In an interview with the Financial Times, the IMF’s Gita Gopinath noted that the Fed is preparing to reduce its support in the event of a pandemic, highlighting economic pressures on low- and middle-income countries that have suffered disproportionately from the crisis. coronavirus.
“She said [emerging markets] face much stronger headwinds. “
Emerging markets cannot ‘afford’ a repeat of the 2013 ‘taper tantrum’ market disruption that occurred when the US Federal Reserve signaled an earlier than expected withdrawal of stimulus measures, sparking prices soaring. global borrowing costs, warned the IMF’s chief economist.