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global financial crisis Likely impact on Bangladesh

The stock price plunge and severe credit crunch we are watching today in global financial markets are byproducts of the developments in the US six years ago. In late 2001, fears of global terror attacks after 9/11 shook an already struggling US economy, one that was just beginning to come out of the recession induced by the bursting of the dotcom bubble of late 1990s.

In response, during 2001, the Federal Reserve, the US central bank, began cutting interest rates dramatically to encourage borrowing, which spurred both consumption and investment spending. As lower interest rates worked their way into the economy, the real estate market began to get itself into a frenzy. The number of homes sold and the prices they sold for increased dramatically, beginning in 2002. At the time, the rate on a 30-year fixed rate mortgage was at the lowest levels seen in nearly 40 years.

Subprime and similar mortgage originations in the US rose from less than 8 percent of all mortgages in 2003 to over 20 percent in 2006.

The crisis began with the bursting of the US housing bubble and high default rates on subprime and adjustable rate mortgages, beginning in approximately 2005-2006. For a number of years prior to that, declining lending standards, an increase in loan incentives such as easy initial terms, and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favourable terms.

However, once interest rates began to rise and housing prices started to drop in 2006-2007 in many parts of the US, refinancing became more difficult. Default and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and adjustable rate mortgage interest rates reset higher. Foreclosures accelerated in the United States in late 2006 and triggered a global financial crisis through 2007 and 2008.

Initially the companies affected were those directly involved in home construction and mortgage lending. Financial institutions, which had engaged in the securitisation of mortgages, fell prey subsequently. The rest is history.

The crisis is still unfolding. There remains great uncertainty as to the depth and severity of the crisis as well as its impact on the real sectors (so called main streets) in US and Europe. This makes it difficult to assess clearly how it will impact Bangladesh.

However, overall, there is absolutely no reason to panic. Bangladesh is relatively insulated from the financial side, but vulnerable to potential global economic slowdown, particularly in the US and EU. The foreign exchange reserves of Bangladesh Bank and commercial banks have limited exposure to the securities markets and banking system risk in the US and EU.

Foreign capital flows are largely in the form of concessional official lending. FDI and foreign portfolio investments are small. However, Bangladesh’s economy relies heavily on garment exports. This is where the main risk lies. Remittances may also be vulnerable. On the positive side, import payments may be favourably affected as a result of declining commodity prices, particularly oil and food.

The export sector is potentially the most vulnerable in Bangladesh since it depends heavily on US and EU economies. The readymade garment (RMG) industry accounts for over three quarters of export earnings and depends almost entirely on US and EU markets. There is growing concern that a deep and prolonged recession in the US and EU may reduce consumer spending significantly across the board, thus undermining the demand for Bangladeshi exports. BGMEA and BKMEA have indicated that growth in export orders was slow in the first quarter of Fy08. IMF has projected that income growth in Bangladesh’s export markets will decline from 1.5 percent in 2008 to 0.5 percent in 2009. If this happens, consumer spending will decline.

Although demand for Bangladesh’s exports is not too sensitive to income, export prices may decline and this could have significant effects on our export earnings even if export volumes remain largely unaffected.

There is unlikely to be any direct immediate impact on remittances. Remittances in Bangladesh proved to be resilient during previous financial crises in the world. The bulk (over 60 percent) of Bangladesh’s remittances come from the Middle East, and less than one-third come from the US, UK and Germany. Strong remittance growth (44 percent) has continued in the first quarter of FY09.

However, if a deep and protracted recession ensues in the US and EU, then the Middle-Eastern economies are likely to be adversely affected. Stock markets in important Middle-Eastern economies have already started to crash. Even if the current nearly $8 billion level of remittances is sustained, it would be challenging to maintain its growth momentum since 2001 if the world economy remains depressed for an extended period.

Official aid flows may take a hit. Governments in rich donor countries are doling out massive amounts to rescue their domestic financial institutions. They may look for savings from other sources to finance these bailouts. Foreign aid budget is relatively easy to cut since the foreign aid recipients do not count as their voters.

Import is probably the one channel through which Bangladesh may benefit. Import payments in August have reportedly been US$531 million lower than import payments in July. This decline in import payments is mainly due to the fall in prices of petroleum products, wheat and edible oil. Record high oil prices last year raised import payments to over US$20 billion in FY08, compared to slightly over US$15 billion in payments in FY07. The gains on account of reduced import payments can be sizable.

While mindful of the risks, early indications in FY09 are that the economy is on track to achieving the 6.5 percent growth projected by the government. Agricultural production outlook so far looks very good, export growth in July was exceptionally strong (71 percent), and service sector growth should maintain its recent growth trend.

Bangladesh’s remarkable resilience so far to this ongoing global financial crisis and slowing growth in high-income countries is in large part because of the country’s relative insulation from international capital markets and the negligible role played by foreign portfolio investors in the country. This resilience also derives from sound policy framework and macroeconomic fundamentals. However, investor psychology is much less insulated than the capital market itself, as demonstrated by the sudden increase in volatility in Dhaka and Chittagong Stock Exchanges last Sunday (October 12).

The overall financial leverage in Bangladesh is low. Unlike the global financials, Bangladesh’s banking system has no toxic derivative engagements. Barring a prolonged slowdown in the world economy leading to a drastic reduction in RMG exports, it is highly unlikely that the external shocks will increase the risk of asset quality problems or precipitate a credit crunch in Bangladesh. This is due to Bangladesh’s low level of external debt, robust international reserves, and limited direct exposure to the international financial system.

Low level of global integration shields Bangladesh from the global financial turmoil. However, Bangladesh is far from being completely insulated. Its heavy dependence on US and EU markets for merchandize exports is a real source of vulnerability as are remittances and foreign aid, though may be to a lesser extent. There is therefore no alternative to stronger policy vigilance and preparedness.

Policy makers have to make sure that markets do not panic by continuously providing evidence on the economy’s resilience in various sectors. They must proactively monitor the channels through which the global financial turmoil may start creeping into the Bangladesh economy and take appropriate mitigation measures.

Inflation has recently been the biggest macro policy challenge in Bangladesh. With the aggravation of the financial turmoil we have seen a sharp decline in global commodity prices. This makes the inflation battle a little easier for Bangladeshi policymakers. But new policy dilemmas are likely to emerge if export earnings begin to slow down and currencies of Bangladesh’s competitor countries depreciate. This will put exchange rate policy under pressure to maintain export competitiveness.

Market interventions aimed at depreciating the currency will dilute through declining international commodity prices to domestic prices and, consequently, undermine the objective of reducing inflation from its current double-digit level.

For Bangladesh a more momentous shock over the past couple of years has been the soaring price of commodities, which some have also blamed on financial speculation. The food-price spike in late 2007 and early 2008 caused havoc to the lives of the poor and middle-income groups. In response, the government extended its reach by increasing subsidies and expanding safety nets. FY09 budget has already built-in an expansionary stance to continue providing support to the poor so that they can afford to pay the high food prices.

If manufacturing is hit badly by recession in western economies, there will be fresh demand for further expansion of safety nets and increase in direct and indirect subsidies to exports. This will call for some more tough choices, accommodate these demands through increased domestic borrowing and/or restrain other spending if additional concessional financing cannot be mobilised from external sources.

Garment Workers’ Demand Fortnight begins

Productivity stressed for RMG industry

Textile experts yesterday advised Bangladeshi entrepreneurs to take initiatives to enhance productivity and the quality of goods if they want to exploit potential for the garment industry.

The apparel industry has flourished in Bangladesh, but real gains will erode if the industry does not address a few crucial issues such as low productivity, inconsistent quality and social responsibility, said Rajesh Bheda, principal of Rajesh Bheda Consulting, India.

In a presentation on “Competitiveness through Productivity and Quality” at a seminar organised by Bangladesh Garment Manufacturers and Exporters Association (BGMEA) at Sonargaon Hotel, Bheda said the productivity levels of Asian apparel industry, especially in Bangladesh, had been low compared to the global benchmark performance.

Referring to a “competitiveness enhancement programme” by BGMEA, he said the programme would improve the productivity levels in the BGMEA member factories.

The pilot phase of the programme showed that labour productivity in five factories was up to 30 percent higher than the previous productivity level.

“Based on our limited exposure to the Bangladesh apparel industry, we see tremendous scope of improvement in the area of quality in the manufacturing units here,” Bheda said.

He said Bangladesh’s apparel industry had tremendous untapped potential in the areas of productivity and quality.

In another presentation, Vandana Bhandari, professor of the National Institute of Fashion Technology in India, stressed diversification of designs. She asked the businessmen to invest more in designs to invent new designs.

Professor Nasrin Khondaker, research director of the Centre for Integrated Rural Development for Asia and the Pacific, emphasised industrial relations in the garment sector saying it had always been a “joint industry”.

She said industrial relations in Bangladesh were deteriorating and stressed more investment in training for workers.

Nasrin asked the garment owners to provide workers with more incentives and share profits with them.

Improve skill, productivity to face global recession

Improvement of efficiency and productivity is the key for the garment industry to survive at this time of global financial recession, economists and exporters said at a seminar yesterday.

They said no adverse impact was noticed as yet in the export of Bangladeshi garment items following the global financial meltdown.

“No adverse effect is foreseeable and the overall effect is likely to be the least,” said Mamun Rashid, managing director and CEO of Citibank NA Bangladesh, at the seminar.

Mamun also presented the keynote paper on “Global Recession and its impact on RMG” in the seminar organised by Bangladesh Garment Manufacturers and Exporters Association (BGMEA) on the sidelines of the association’s annual 19th BATEXPO at the city’s Pan Pacific Sonargaon Hotel.

He observed that currency devaluation is not the only solution for survival from the recession as such a decision depends on a lot of things and takes a lot of time.

“But, there are some signs of improvement as the governments of different countries have already taken some bailout programmes of US$ 3 trillion to rescue their economies from the ongoing global financial recession and bring back confidence among the consumers,” Mamun said in his keynote paper.

He said the recession may not prolong as the affected countries have started infusing and consolidating the capital in the financial sector and cutting down interest rate.

The downward trend of cotton price is also a plus point for Bangladesh as the country’s garment manufacturing is mainly dependent on imported cotton. The price of cotton declined to 49 cents per pound from its previous 70 cents per pound, he said.

Bangladesh can take the opportunities of worldwide price decline of commodities like cotton, edible oil, petroleum products, wheat and rice, Mamun said.

He said there are some factors for which Bangladesh may remain safe from the global financial recession. The factors include limited Foreign Direct Investment (FDI) inflow, insulated capital market, lack of foreign portfolio investment, limited exposure to foreign securities markets, controlled financial environment and lack of market information, he added.

“Bangladesh is more or less decoupled from the rest of the world,” Mamum said in his keynote presentation.

Mamun said the current recession is different from the 1929 great economic depression in the USA because this time the central banks of the affected countries have been taking their best actions, which were not taken during the depression period of 1929.

He said the greatest challenge for the country is to constantly focus and enhance the efficiency and productivity.

“Government should come forward with policy support agenda by offering competitive exchange rates, streamlining customs procedures and providing further incentives in bonded warehouse facility. There is a crucial need to develop the country’s infrastructure by ensuring uninterrupted flow of power and overall improvement in road networks and port efficiencies,” Mamun said.

Chief Executive Officer of Bangladesh Foreign Trade Institute (BFTI) Dr MA Taslim moderated the seminar where Economics Department teacher of Dhaka University Abu Ahmed, economist Dr Quazi Kholiquzzaman Ahmed and BGMEA president Anwar-Ul-Alam Chowdhury Parvez spoke as panel discussants.

Suggesting that the garment and textile owners raise capital from the stock market through IPO flotation, Abu Ahmed sought to dispel the fear that Bangladesh’s economy might be affected by the global economic recession.

“Our banks are well regularised. Our economy is peaceful and lawful. So, the economic growth will be seven percent in near future,” Abu Ahmed said.

Kholiquzzaman said involving only the government officials in the monitoring committee is not enough and it is necessary to include independent experts in the committee. Recently, the government formed a committee to monitor any bad impact on the local economy following the global financial recession.

Parvez urged the government to ease the visa system for foreign buyers and visitors, as they have to face a lot of troubles to come to Bangladesh. “We need policy support from the government rather than cash incentives,” Parvez said.

He said there is a shortage of 25 percent skilled workers in the garment sector at present.

Akbar Hassan of BRAC University also presented a paper on “Changing time and changing focus in garment trade” in the seminar

Exporters take $59m in spot orders at Batexpo

Garment Workers’ Demand Fortnight begins

Workers’ festival celebrated with high hopes

Apparel industry unveils ambitious target for export

Bangladesh apparel-industry leaders yesterday unveiled an ambitious export target of US $ 25 billion and additional 2 million jobs in next five years, keeping well in mind the impacts of possible long-term recession following the recent global financial crisis.

“ We have proved ourselves as a strong player in the apparel sector so far and have been branded among the best competitive RMG producers,” President of Bangladesh Garment Manufacturers and Exporters Association (BGMEA) Anwar-Ul-Alam Chowdhury told members of the Overseas Corespondents Association, Bangladesh (OCAB) at his office ahead of their mega-event Batexpo-2008.

He said the ready made garment (RMG) exports rose to US$ 10.7 billion in the last fiscal year and the first month of present fiscal recorded a 71 percent growth, which he said not only impressive but also reflects the industry’s strength and capability.

Chowdhury, however, did not rule out any adverse impact of a possible longer recession due to the global economic recession and urged government policymakers to evolve immediate action plans to face the future challenges.

The BGMEA president said Bangladesh’s competitors like India, Pakistan, Vietnam, Thailand and even China already devalued their currencies. Without wasting time, policymakers and economic experts should work out effective measures to protect the industry, the “backbone” of the national economy.

He said the BGMEA is making relentless effort to promote the market of the garment industry.

Batexpo 2008, the 19th Bangladesh Apparel and Textile Exposition, will be held November 6-8 at Sonargaon Hotel.

Chief Adviser Dr Fakhruddin Ahmed would inaugurate the exposition as chief guest, while Chief of Army Staff General Moeen U Ahmed will attend the closing ceremony as chief guest.

Batexpo, the largest clothing exposition in the Asia-Pacific region, will enable foreign buyers and their representatives to see Bangladeshi textiles, clothing and accessories.

This year the organisers expect more buyers as 65 different organisations have already registered to display their products in 75 stalls.

RMG in shadows of global turmoil

The global financial turmoil seems to have weighed on Bangladesh’s lifeline, garments, as orders are being deferred by buyers from the countries, where stores have reported declining sales.

Exporters have also said buyers are trying to cut down costs of imports to cope with a slump in consumer confidence.

“Generally, September is a golden month for knitwear exporters, but this year’s orders appear to be declining for the first time in four years,” said Fazlul Hoque, president of Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA).

However, remittance inflows, also allied with the global economies, are still immune to probable fallout from the unfolding financial crisis that rattled depositors and investors worldwide.

“If 9/11 had affected Bangladesh’s export growth significantly, I don’t believe this huge crisis would bypass us,” said Hoque.

Hoque’s remarks came a day after Nobel Laureate Professor Muhammad Yunus and others warned that Bangladesh’s export and remittances would take a hit from the global crisis, which promoted governments and central banks around the world to initiate nationalisation and cut interest rates to restore confidence.

Bangladeshi exports, mostly to the US and Europe, are set to become vulnerable to the debacle, although knitwear and garments registered 84 percent and 58 percent growth in July from the same period a year ago.

“Buyers are now bargaining for price reduction,” said Habibur Rahman, owner of Pandemic Fashion Ltd that exports knitwear to Scandinavian countries.

The IMF has recently projected that income growth in Bangladesh’s export markets will decline to 0.5 percent in 2009 from 1.5 percent in 2008.

“The growth of orders received by the exporters in July has slowed down in the last two months,” said Centre for Policy Dialogue Executive Director Mustafizur Rahman, citing his talks with knitwear exporters.

Anwar-ul-Alam Chowdhury Parvez, president of Bangladesh Garment Manufacturers and Exporters Association (BGMEA), has said buyers seem slow to place orders in an apparent sign of businessmen losing confidence in the world markets.

“They (buyers) are now waiting out the turmoil,” the BGMEA president said.

But Mustafizur Rahman of CPD said: “It’s not clear whether this is because of the global economic turmoil or a seasonal outcome. But RMG prices may go down further amid buyers’ move to cut costs.”

Mamun Rashid, chief of Citibank NA in Bangladesh, thinks the problems might run deeper because of the likely delay in export receipts and the possible cancellation of orders.

Of Bangladesh’s export, only less than 30 percent goes to retail giants such as Wal-Mart, Jc Penny’s, Levis, Gap, Zara, Van-Heusen and H&M, while others are mostly small and mid-sized companies, more vulnerable to any financial shock or surprise.

However the ultimate impact may be little less because of diversion of orders from other countries such as Vietnam and China due to rising labour costs in those countries, Rashid said.

BRIGHTER SIDE

Zaid Bakht, research director of Bangladesh Institute of Development Studies, believes RMG exporters would receive increased orders for its edge over China where the production costs would jump another step in the wake of the crisis.

Professor MA Taslim, chief executive of Bangladesh Foreign Trade Institute, also looks at the brighter side of the situation.

“It’s also an opportunity. Garment makers can take advantage of the decline in exports from other countries by increasing competitiveness,” said Taslim, citing the example of China, which raised exports after the 9/11 attacks on the US.

Analysts suggested that the regulator maintain a competitive exchange rate to encourage exporters and remitters. They also suggested a mechanism for timely delivery, cheap sourcing of raw materials and no hike in utility prices.

Although some argue that remittance inflows would slow due to the global turmoil, Zahid Hussain, a senior economist for the World Bank’s Dhaka office, said any direct immediate impact on remittance looked unlikely, as its inflows remained resilient against the previous financial crises in the world.

In Bangladesh, the bulk of remittance inflows, which recorded a significant rise in the first quarter of the current fiscal year, come from the Middle East, and less than a third comes from the US, UK and Germany.

“However, if a deep and protracted recession starts in the US and EU, the Middle Eastern economies are likely to be adversely affected,” Hussain said.

“Even if the current nearly $8 billion level of remittances is sustained, it would be challenging to maintain its growth momentum if the world economy remains depressed for an extended period,” he said.

Exporters see silver lining

Garment exporters and major buyers say the global economic crisis will not affect Bangladesh’s readymade garment sector as it exports mainly basic products.

“Buyers will flock to Bangladesh for cheaper RMG products as major competitors such as China, India and Vietnam make mainly high-end garments,” said an official of a buying house, requesting anonymity.

He said the sales of cheaper RMG products increased both in Europe and the US by 20 percent following the global financial turmoil.

Manufacturers said only 5 percent of Bangladesh’s readymade garments are high-end.

KI Hossain, a local buyer, said the global financial recession might be a boon for Bangladesh and a bane for competitors.

“The number of orders we are receiving from foreign buyers is still high as the buyers now look to cheaper RMG products,” he said.

“I don’t see any negative impact of the financial turmoil on the export of Bangladeshi readymade garments,” said a senior official of an international buying house in Dhaka.

Talking to The Daily Star, Ghulam Faruque, chairman of SQ Group, one of the largest sweater exporting groups in Bangladesh, said: “Till now, the situation is good as the flow of foreign orders has been the same. It was rather higher in some cases”

“The bad impact of the global recession may be felt in February or March if the situation in the western financial markets does not improve,” Faruque said.

KM Rezaul Hasanat, managing director of Viyellatex Group, said the buyers of high-end readymade garments of India and China would now outsource products from Bangladesh.

The orders are usually low from August to October and start peaking up from November. “So, we should not be worried about orders,” Hasanat said.

He cautioned that some ‘so-called’ buyers might want to take the opportunity of the recession.

“They may demand rebates or concession. We must handle such a situation smartly,” Hasanat said. He said he did not receive any fewer orders than before.

A recent study of the International Monetary Fund (IMF) said Bangladesh’s abundant and relatively low-cost labour made it an attractive destination for investors.

“Its success in the garment industry, which was the starting point in the industrialisation process for many of the East Asian economies, will make it attractive to investors as will its growing domestic market and good access to the huge Indian market,” said the IMF study report.

According to the study released a week ago, “Although competition is becoming more intense, Bangladesh’s strong market position does not look like diminishing in the short term.”

Bangladesh set an export target at $16.298 billion for fiscal 2008-09, with the readymade garment sector to earn the highest amount of foreign currency. Of $16.298 billion, $12.267 billion is expected to come from two main sub-sectors of RMG: knitwear and woven.

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