Commentary

FDI and Capital Market in the Pandemic: Looking Beyond

Mamun Rashid

8 February, 2021 12:00 AM printer

FDI and Capital Market in the Pandemic: Looking Beyond

Saying that the year 2020 has been a challenge for Bangladesh capital market and investments will be an understatement. The year has tested the resilience and morale of the global economy. Even with the hope instilled by the Covid-19 vaccines being manufactured and distributed, reeling from the damage the pandemic has done for individuals, economies and social constructs will take years. In the face of this, Bangladesh has shown promise to the entire world by managing this singular challenge quite effectively and efficiently, with its very limited resource and capability.

It is easy to see the direct havoc this pandemic has caused for the economy but what does it mean for Bangladesh’s financial sector?

When global consumption slowed down, the export sector took the first hit. Although some stimulus has healed the sector to some extent, falling global demand has no remedy. Shutting down production was never an option for the sector but operating in a pandemic with low demand has left a lot of them in financial stress which will take quite some time to reverse. The export sector is the largest borrower for the banking system of the country. This stress is already spilling over to that sector and will continue to do so in coming days.

This is not the only challenge the financial sector has to deal with. The slowdown of domestic borrowing along with consumption reduction is leading to a sector drained out of liquidity, which can be detrimental in the long run. On top of that the country has recently seen remittance increasing to all time high. As we talk to the leaders in the financial sector, we understand that these are challenges that everyone is trying to manage, but no one has any short-term solutions for.

As for the capital market, it is the nervous system of the economy and will also reflect the ups and downs the economy is facing. The capital market took the initial hit of the pandemic in the first half of the year and started showing the recovery in the later half. As mentioned, the current status in the financial sector and the low consumption has driven some liquidity in the market. Some notable scrips and new issues have driven the market in the positive direction as well. This might also continue in the upcoming days driven by the hope vaccine provides for the economy. The demutualization of the stock exchange and FDI into the exchange itself is the result of the long-term growth story of the country, not short term.

On capital markets, though there is some hope with the new leadership, I am still concerned with possible manipulation by some large operators. The banking sector is likely to suffer more with staggering bad loans and capital shortfall. Weak but politically influential bank owners will still be showered with extraordinary favours.

In the global context, global investment has been down by close to 50% in 2020 according to UNCTAD, but this should come as no surprise. Cross-border M&A activity has declined by 15% and investment in Greenfield projects has declined by close to 40%. But we talk to the global investors and there is a strong sense that we are not alone in this dilemma. The decline in investment is not solely driven by the uncertainties the pandemic posed for the economy; it is also driven by logistical challenges and policy decisions. The investors are as bullish on the long-term growth story of the economy as they have ever been. It was necessary for them to see how the country deals with the pandemic with its limited resources.

I would expect Bangladesh to undertake a balancing act between Indian and Chinese investment in the coming days. With healthcare, FMCG and the food sector showing a lot of upside during the Covid-19, we may see other European and North American investment in this opportunity space too. We might see consolidation happening in the power and energy sectors in the next 2/3 years. Agri-manufacturing, API (Active pharmaceutical ingredients), insurance and green industrialization may be the focus areas from the development partners.

The sectors in Bangladesh that look promising for FDI are infrastructure, consumer and financial sectors. The majority of the FDI in the country has long been driven by power and infrastructure. And this momentum is likely to continue in the future. But the sectors with hidden promise are the ones driven by the consumers of Bangladesh. The world is starting to recognize this as well. Consumer and Financial Sectors including Fintech will be the focus for FDI in Bangladesh and 2021 can very well be the year we start seeing that shift.

We will have to wait and see how Bangladesh as an economy ultimately deals with the pandemic and its challenges, which will decide on the fate of the capital market. Expect for the first few months, the economy has maintained its momentum and has demonstrated its characteristic resilience. 2021 has the potential of being the year of full recovery for Bangladesh. As we reel from the effects of the pandemic, it will soon be time for Bangladesh to get back into the ring with full force and deliver on the growth promise the country has been making for the past decade.

 

Mamun Rashid is a leading economic analyst.


Top