Emerging economies generally grow faster than advanced industrialized economies due to their relative degree of underdevelopment. Foreign direct investment (FDI) facilitates growth convergence through capital deepening, as foreign capital flows into emerging economies, either in the form of portfolio capital or direct equity/debt longer term.
Since these economies are less integrated into global markets, they typically offer a higher risk premium to foreign investors, including a term premium, credit premium, equity risk premium, and liquidity premium.
The MSCI Frontier Markets Index captures large and mid cap representation across 28 “frontier market” countries, which include: Bangladesh, Burkina Faso, Croatia, Estonia, Guinea-Bissau, Ivory Coast, Kenya, Nigeria, Oman, Pakistan, Sri Lanka, and Vietnam.
All emerging market and frontier market economies compete fiercely to attract FDI as investors have a wide choice of strategic investment destinations i.e. asset allocation decisions and choice of preferred countries and sectors.
Aware of the highly competitive FDI landscape, various government investment promotion agencies are aggressively marketing their national brands in order to be in the forefront of attracting the best investors.
Foreign private and institutional investors make strategic asset allocations, taking concentration risk into account.
Although positive economic growth improves equity valuations, it can dampen bond market valuations due to rising interest rates and a flattening yield curve, which encourages lower bond market valuations. exposure to the duration of the portfolio and the improvement of the convexity of the portfolio.
In the post-Covid environment, restoring macroeconomic resilience will be a key driver of FDI growth in frontier markets such as Bangladesh.
Foreign investors are not only looking for business-friendly investment, regulatory and tax climates; they seek political and economic stability, low cost of production, efficient infrastructure, access to a skilled and productive workforce; and increasingly, political regimes sensitive to ESG (environment, social and governance).
In addition, an impartial legal and judicial apparatus; exchange rate and monetary stability; a dynamic balance of prudential policies; minimal amount of economic friction or distortion; and above all, high relative risk-adjusted returns from investments are necessary, but not entirely sufficient, conditions for FDI commitments.
According to UNCTAD’s World Investment Report 2021, although FDI inflows fell by 35% globally in 2020, they fell by only 8% in developing economies. Top FDI destinations in 2020 were: United States, China, Hong Kong, Singapore, India, United Arab Emirates, United Kingdom, Indonesia, Vietnam and Japan.
The top 10 FDI investors in 2020 included: China, Luxembourg, Japan, Hong Kong, United States, Canada, France, Germany, South Korea and Singapore.
FDI in South Asia increased by 20%, mainly driven by strong M&A activity in India, where FDI increased by 27% and reached $64 billion in 2020, according to the UNCTAD report. In Pakistan, FDI fell by 6% in Pakistan, cushioned by continued investment in the power generation and telecommunications sectors.
According to the Bangladesh Bank, net FDI inflows into the country were only $2.6 billion in FY18, $3.9 billion in FY19 and 2, $4 billion in FY20. Garment factories in Bangladesh faced some $3 billion in canceled export orders in 2020, although RMG’s order book appears to have rebounded in 2021/22.
According to UNCTAD, the outlook for FDI in LDCs remains weak in the immediate term, i.e. 2022-2026. So how can Bangladesh accelerate FDI growth?
Bangladesh has a labor force of 67.23 million people, with one of the lowest labor costs in the world. With a literacy rate of 74.68% and almost a quarter of its population living below the poverty line, the cost of labor in our country will remain cheap.
According to The Global Economy, the ratio of capital investment to GDP in Bangladesh stands at 30.47% in 2020. In 2019, FDI amounted to $1.91 billion, or 0.63% of GDP. Over the same period, foreign and official development assistance received amounted to $4.48 billion.
TheGlobalEconomy.com, which provides trade and economic data for 200 countries, and is regularly consulted by global investors, presents a range of economic data that foreign investors observe.
On a scale of +2.5 to -2.5, Bangladesh receives a negative rating for rule of law, government effectiveness, control of corruption, regulatory quality, voice and accountability and indices of political stability.
Bangladesh scored 20.2 and 29.14 out of 100 respectively in the Innovation Index and Economic Globalization Index. In 2020, Bangladesh ranks 168 out of 190 countries in the World Bank‘s “Ease of Doing Business” ranking.
Currently, Bangladesh is not classified as an investment grade country. Emerging countries seek investment-grade status to reduce government funding costs, broaden the pool of potential investors to institutional investors, and give companies the opportunity to lower their borrowing costs.
Bangladesh’s current sovereign credit ratings are equivalent to a non-investment grade speculative or junk bond rating.
Bangladesh has been posting mid to high single-digit real GDP growth for more than a decade, which has paid off in terms of socio-economic development. It is now 37and largest economy in the world with a GDP of $419 billion. Its strongest sector, ready-to-wear, holds 6.3% of the global market.
With 628 listed companies, the market capitalization in Bangladesh is $89.77 billion in 2020 (27.69% of GDP), with average stock returns of 26.91%. In contrast, the market capitalization is 97.6% in India, 100.4% in Nepal, 51.2% in Vietnam, 121.4% in Malaysia and 45.2% in Indonesia.
Although macroeconomic and business climate data are mixed with respect to the current state of the economy, I believe that Bangladesh has significant growth potential, with a resilient and innovative business community and a diligent and productive albeit under-qualified workforce.
The comparative advantage of low labor costs is partially offset by relatively low labor productivity compared to major Asian rivals. This is demonstrated by looking at the World Development Indicators 2019 database, which shows that industry value added per worker in 2019 was $5,648 in Bangladesh, compared to $5,744 in Vietnam, $5,795 in India, $6,484 in Myanmar, $14,511 in the Philippines and $32,447 in Malaysia. .
According to the IMF’s Balance of Payments Database, net FDI inflows to Bangladesh over the past 10 years (2010-2019) amounted to $20.5 billion compared to the absorptive capacity significantly higher than the country clearly represents.
During this period, Myanmar recorded net FDI inflows of $24.8 billion, the Philippines $58.6 billion, Malaysia $106.9 billion, Indonesia $194 billion, $2 billion and India $371.8 billion.
While Bangladesh’s modest branding efforts are visible through official channels including BIDA, BEPZA, SEC, etc., the country’s FDI growth performance has been surpassed by almost all emerging economies.
Privatization of state-owned enterprises is a potential avenue for the government of Bangladesh to explore in terms of supporting a market economy. China and India were the top two emerging countries in terms of total privatization receipts in 2015.
From the perspective of the institutional investor, the lack of risk management instruments such as options and futures markets, or the ability to trade volatility as an asset class further limits the ability dynamic investment management.
Bangladesh needs to improve its competitiveness and the sustainability of its economic and regulatory reform, in order to be more successful in attracting FDI at an accelerated pace. Its persistent current account deficits result from consumption exceeding savings and fiscal deficits supported by volatile remittances.
Currency hedging can be facilitated by currency overlay strategies or non-deliverable forward contracts, since the taka is not convertible in the capital account. The imminent depreciation of the taka is due to inflationary pressures which have an impact on the appreciation and probable overshoot of the real effective exchange rate (REER) in the medium term.
Not only do internal government policies on FDI need to be cross-cuttingly consistent for FDI inflows to remain sustainable over several years, but it is imperative that existing foreign investors act as advocates for Bangladesh and improving its investment climate. International chambers of commerce can play a constructive role here.
Samir Assaf. Sketch: TBS
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Samir Assaf. Sketch: TBS
Samir Asaf is Global Managing Director at DelMorgan & Co. Investment Bank (USA). E-mail: [email protected].
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.
