At Capital Weekly 29 September 2008

AT CAPITAL RESEARCH

29 September 2008

AT Capital Weekly Update Weekly News Update

Key themes in this issue are: Global markets: markets: • Congressional negotiators and Bush administration officials have reached an agreement on a • • • • • • • •

USD 700bn rescue plan for the US financial system. In the light of Thursday's WAMU bankruptcy, the largest bank failure in US history, and the mounting pressure on Wachovia (the fourth largest US bank) any failure to reach a deal would have had such cataclysmic consequences that it had to be agreed. The global nature of the crisis is underlined by the nationalization of Bradford and Bingley (B&B) in the UK and the collapse in the share price of Belgium's largest bank Fortis. In Hong Kong, the Bank of East Asia required a massive liquidity injection by the Hong Kong Monetary Authority and share purchases by Li Ka-Shing to bolster confidence. While one can support the efforts of policy makers to avoid further chaos in financial markets, it is important not to overlook the risk that the financial firefighting may create serious long term problems. Bank credit risk is escalating - The A2/P2 Spread hit 409bp yesterday. This is literally off the chart compared to any previous period. US Housing weakness persists - Sales of new one-family houses in August 2008 were at a seasonally adjusted annual rate of 460,000 - this is 11.5% below July data and 34.5% below August 2007 The Baltic Dry Index has collapsed 42% from its all-time high last November - the risks are for global commodity prices to follow and move sharply lower as the pain spreads from the US to Europe and to Asia and other Emerging Markets. We provide a recap on the causes of the Great Credit Crunch of 2008

Bangladesh Overview and Special Focus: •

Asian Tiger Capital Partners

• EDITORS

Ifty Islam Managing Partner [email protected] Syeed Khan Partner [email protected] Professor Jahangir Sultan Senior Advisor [email protected] Masud Khan Senior Advisor [email protected]

Asian Tiger Capital Partners UTC Building, Level 16 8 Panthapath, Dhaka-1215 Bangladesh Tel: 8155144, 8110345 Fax: 9118582 www.at-capital.com

• •

In light of the BOI’s statement that it would discourage investment in industries that rely on gas due to depletion of reserves, we reiterate the need to push through the Coal Policy without delay The retail industry in Bangladesh presents tremendous potential, considering two of the largest drivers for growth within the sector are urbanization and income per capita. Prospects for Indian Retailing and lessons for Bangladesh We discuss industry dynamics, constraints and prospects for growth

We will not be publishing the AT Capital Weekly next week due to the Eid break. We will however be publishing the AT Capital Renewable Energy Report next week.

USD 700bn rescue package to keep the US afloat

29 September 2008

Contents

AT CAPITAL RESEARCH Page

Overview – Global Markets USD 700bn lifeline for the US financial system

3

A recap on causes of the great credit crunch of 2008

4

Longer term risks of bail out

4

IMF perspectives on global banking crises

4

Bank credit risk escalating

5

US housing weakness persists

5

Global Economy Slowing - Baltic Dry Index at two-year lows

6

And finally…

7

Overview – Bangladesh Time to finalise and push through the coal policy without delay

8

Coals reserves in Bangladesh8

8

Prospects for Indian retailing and lessons for Bangladesh

8

The fragmented nature of Indian retail

9

Bangladesh retail – organised and unorganised

9

Favorable demographics

9

Special Focus – Retail

10

Stock Market Weekly

13

Weekly Stock Market Commentary

14

Stock Market News

14

Economics

17

Economic News

18

Sector News

20

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AT CAPITAL RESEARCH Ifty Islam, Managing Partner [email protected]

Overview Overview – Global Markets Markets USD 700bn lifeline for the US financial system

Negotiators found a way to address concerns that the bailout plan insufficiently protected taxpayers. If, after five years, losses were incurred by the government on the sale of the troubled assets it purchases through the programme, the US president would have to present a plan to recover the money from those who benefited from it. While imposing curbs on the compensation of executives at companies participating in the bail-out, Democrats dropped demands that shareholders be given a vote on pay. The USD 700bn would be authorised fully but released in three stages, beginning with an initial $250bn. Congress would review and could in principle block the final $350bn disbursement. A draft of the bailout deal can be found at: http://online.wsj.com/public/resources/documents/bailoutbill2 0080928.pdf In the light of Thursday’s WAMU bankruptcy (one of the largest US mortgage servicers/loan companies) and the th mounting pressure on Wachovia (the US’s 4 largest bank) any failure to reach a deal would have such cataclysmic consequences that it had to be agreed.

At the time of writing Sunday evening Dhaka/Sunday morning EST, newspaper reports suggested that Congressional negotiators and Bush administration officials had reached an agreement on a USD 700bn rescue plan for the nation’s financial system. Concerns about the plan can be found in academia as well as with a number of Congressmen. Professor Nouriel Roubini of NY Stern School and one of the earliest housing bears, summed it up as follows: “The Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown."

Wachovia was in talks with multiple suitors that include Citigroup Inc., Wells Fargo & Co. and Banco Santander SA, people familiar with the situation said. One key factor in the discussions is the potential impact of the proposed USD 700bn federal bailout plan, which could rid Wachovia' books of some bad assets and make potential acquirers less wary about losses lurking in its massive mortgage portfolio. Wachovia's fall began with its $25 billion purchase of mortgage lender Golden West Financial Corp. in 2006. While then-CEO G. Kennedy Thompson Jr. touted the deal as a "grand slam home run" given Golden West's reputation for screening borrowers, the Oakland, Calif., company had been lending to people with weaker credit scores in places where housing prices are in decline, such as California and Florida. Wachovia now predicts losses from that USD 122bn mortgage portfolio could approach 12%.

However, any failure to pass the bill risks a financial “nuclear meltdown”. The New York Times Sep 28 reported that Congressional staff members would work through the night to finalize the language of the agreement and draft a bill, and that the bill would be brought to the House floor for a vote on Monday. The bill includes pay limits for some executives whose firms seek help, aides said. And it requires the government to use its new role as owner of distressed mortgage-backed securities to make more aggressive efforts to prevent home foreclosures. In some cases, the government would receive an equity stake in companies that seek aid, allowing taxpayers to profit should the rescue plan work and the private firms flourish in the months and years ahead. The White House also agreed to strict oversight of the program by a Congressional panel and conflict-of-interest rules for firms hired by the Treasury to help run the program.

The global nature of the crisis is underlined by the nationalization of Bradford and Bingley (B&B) Building Society in the UK and the collapse in the share price of

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29 September 2008 Belgium’s largest bank Fortis. The UK Sunday Times reported that the Treasury was poised last night to nationalise Bradford & Bingley (B&B), the troubled mortgage bank. In an attempt to try to avoid a re-run of the Northern Rock debacle the government plans to hold an immediate fire sale to sell off B&B’s assets to one or more banks. The Spanish banking giant Santander was in talks last night about its potential role in the rescue. Another buyer could be HSBC. Although the Financial Services Authority had been trying to find a single white-knight bidder to take over B&B’s loans in their entirety, it was reported that Britain’s big banks refused to get involved. It was also reported on Sunday that Fortis is this weekend poised to become the first large continental bank to fall victim to the credit crunch, as the global chaos continues with Bradford & Bingley and American savings giant Wachovia both teetering on the brink. Fortis is the largest European firm so far caught up in the global financial crisis. Fortis dropped 35 percent last week on concern the company would struggle to replenish capital depleted by the 24.2 billion- euro takeover of ABN Amro Holding NV units and credit write downs. Fortis, the largest Belgian financial-services firm, received an 11.2 billion-euro (USD 16.3bn) rescue from Belgium, the Netherlands and Luxembourg after investor confidence in the bank evaporated last week. Fortis has fallen 71 percent this year, the second-worst performance among the 69 companies on the Bloomberg Europe Banks and Financial Services Index, cutting the lender's market capitalization to 12.2 billion euros. The company has about 3 billion euros of bonds maturing this year and needs to refinance an additional 7 billion euros next year, said Ivan Lathouders, an analyst at Banque Degroof SA in Brussels, in a report last week. Belgium will buy 49% of Fortis's Belgian banking unit for EUR 4.7bn, while the Netherlands will pay 4 billion euros for a similar stake in the Dutch banking business, the governments said in a statement late yesterday. Luxembourg will provide a 2.5 billion-euro loan convertible into 49% of Fortis's banking division in that country. There was also a run in Hong Kong on the Bank of East Asia prompting a massive liquidity injection by the Hong Kong Monetary Authority and share purchases by Li Ka-Shing, Asia’s richest man, to bolster confidence. So we will assume that the deal goes ahead and in the rest of this section of the weekly, we consider some of the longerterm risks from the bailout.

1. 2. 3.

4.

5.

6. 7.

The bubble in home prices, fueled by the ready availability of credit, resulted in an underestimate of the Risks of residential real estate; the Greenspan Fed swapped one tech-driven bubble for another housingdriven one. The peaking of residential home prices in 2006, combined with lax lending standards were followed by a very high rate of delinquencies on subprime mortgages in 2007 and a rising rate of delinquencies on prime mortgages. Losses thereafter on the complex collateralized debt obligations (CDOs) that were backed by these mortgages; these CDOs were opaque means by which banks hid many of the risks away from their balance sheets and hence from ratings agencies and regulators. Increased liabilities by the many financial institutions (banks, investment banks, insurance companies, and hedge funds) that issued “credit default swaps” contracts (CDS) that insured the CDOs. Losses suffered by financial institutions that held CDOs and/or that issued CDS’s; the illiquid nature of the securities made it much harder to price these securities. Cutbacks in credit extended by highly leveraged lenders that suffered these losses. This will link the crisis on Wall Street to Main Street or the broader US economy. It is not just mortgage finance that is being squeeze but lending on all sorts of consumer loans as well as to corporate America. Indeed the squeeze on credit is affecting companies around the world as well as banks.

Longer term risks of bailout While one can support the efforts of policy-makers to avoid further chaos in US and global financial markets through some means, it is important not to overlook the risk that the financial firefighting may create serious long term problems. As Bailey and Litan note, when government funds on a large scale are used to support private sector companies, without a clear quid pro quo or price to be paid for that support, there is inevitably the problem of moral hazard and the encouragement of excessive risk taking in the future. Furthermore, the sweeping nature of the proposed rescue – benefiting a broad range of financial institutions holding troubled mortgage securities – will make it difficult for policymakers in the future to resist requests by other types of firms in other industries for similar treatment, and more broadly, may undermine for a lengthy period the public’s faith in markets in a wide range of contexts. Whatever steps are taken in the short run to address the current financial crisis, there is at least broad consensus that financial regulatory and supervisory reform is needed to dramatically reduce the likelihood that something like the recent set of events never recurs.

A recap on causes of the great credit crunch of 2008 IMF perspectives on global banking crises crises While there has been many thousands of pages of analysis on the causes, consequences and solutions to the Great Credit Crunch of 2008, one of the most insightful and succinct has come from Martin Baily and Robert Litan in a Brookings Paper on International Finance titled “ A Brief Guide to Fixing Finance “. In it, the authors note that the drivers of the current crisis moved in a domino-like effect as follows:

In the heat of the current enthusiasm to get a deal done, it is worth having a look at a recent paper published by the IMF, “Systemic Banking Crises: A New Database” by Luc Laeven and Fabian Valencia. The report covers the universe of systemic banking crises for the period 1970-2007, with detailed data on crisis containment and resolution policies for 42 crisis episodes, and also includes data on the timing of currency crises and sovereign debt crises.

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29 September 2008 A notable excerpt from the report that highlights the challenges of balancing short-term expediency with longerterm policy risks is as follows: “Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance. Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery. Of course, the caveat to these findings is that a counterfactual to the crisis resolution cannot be observed and therefore it is difficult to speculate how a crisis would unfold in absence of such policies. Better institutions are, however, uniformly positively associated with faster recovery…Fiscal costs, net of recoveries, associated with crisis management can be substantial, averaging about 13.3 percent of GDP on average, and can be as high as 55.1 percent of GDP. Recoveries of fiscal outlays vary widely as well, with the average recovery rate reaching 18 percent of gross fiscal costs” Barry Rieholtz, a well known US economic commentator, and lead author of blog “The Big Picture”, summed up the need for careful regulatory reform, especially of the SEC, suggesting that:

AT CAPITAL RESEARCH The A2/P2 Spread hit 409bp yesterday. This is literally off the chart compared to any previous period. When the A2/P2 spread spiked to 160 last year that was considered shocking; now that spike looks minor.

The A2/P2 spread is the difference between high and low quality 30 day nonfinancial commercial paper. What is commercial paper (CP)? This is short term paper - less than 9 months, but usually of much shorter duration like 30 days that is issued by companies to finance short term needs. Many companies issue CP, and for many of these companies the risk of default is close to zero. This is the high quality CP. Lower rated companies also issue CP and this is the A2/P2 rating. Usually the spread between the A2/P2 and AA paper shows the concern of default for the A2/P2 paper. But right now this shows the credit markets are essentially locked up waiting for the mother of all bailouts.

“We on Wall Street feel somewhat compelled to take at least some responsibility. We used excessive leverage, failed to maintain adequate capital, engaged in reckless speculation, created new complex derivatives. We focused on short-term profits at the expense of sustainability. We not only undermined our own firms, we destabilized the financial sector and roiled the global economy, to boot. And we got huge bonuses. But here's a news flash for you, D.C.: We could not have done it without you. We may be drunks, but you were our enablers: Your legislative, executive, and administrative decisions made possible all that we did. Our recklessness would not have reached its soaring heights but for your governmental incompetence.” Bank credit risk escalating Many US market analysts’ favoured measure of banking sector credit risk is the TED spread (the difference between the LIBOR interest rate and the three month T-bill). Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free" treasuries). The TED spread increased to 3.27% on Friday. Completely off the charts! And the following graph below courtesy of “Calculated Risk” is the A2/P2 spread from the Fed's commercial paper report.

Source: Calculated Risk

US housing weakness persists Sales of new one-family houses in August 2008 were at a seasonally adjusted annual rate of 460,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.5 percent below the revised July rate of 520,000 and is 34.5% below the August 2007 estimate of 702,000.

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29 September 2008

AT CAPITAL RESEARCH

Source: Bespoke Investment

US New "Months of supply" is at 10.9 months. Sales are falling quickly, but inventory is declining too, so the months of supply is slightly lower than the peak of 11.2 months in March 2008. The all time high for Months of Supply was 11.6 months in April 1980. Currently the Case-Shiller futures are predicting a 33% decline peak-to-trough in US house prices, Goldman is forecasting 27%, and Lehman was forecasting 32%.

Historically, the performance of the Baltic Dry Index has correlated strongly to the CRB Index and other commodities indices. But this time, the CRB Index is just a few percent below its all-time high a few weeks ago and has not declined in sympathy with freight costs (see chart below). This might suggest the demand for raw materials remains very strong despite fears of a growth slowdown worldwide. However, we are skeptical. The risks are for global commodity prices to follow the Baltic Index and move sharply lower as the pain spreads from the US to Europe and to Asia and other Emerging Markets.

Global Economy Economy Slowing - Baltic Dry Index at twotwo-year lows While everyone’s attention is on the Hanky Panky bailout plan, the Baltic Dry Index has dropped over 15% this week to two-year lows @ 4163. The London-based Baltic Dry Index, a freight gauge for the transportation costs of major bulk commodities, has collapsed 42% from its all-time high last November. Transportation costs for iron, coal and the grains plunged to a six-month low last week – the largest decline since records began in 1985. The large price drop clearly suggests that global economic growth is slowing and bulk shipping rates are finally coming down to earth following a price explosion since 2003.

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29 September 2008

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And finally…

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Overview – Bangladesh

Coal reserves in Bangladesh

Time to finalise and push through the coal policy without delay

Coal deposit deposit

Depth of deposit (m)

Estimated reserve (mn MT)

Recoverable by underground mining (mn MT)

Recoverable by opencast mining (mn MT)

The issue of depleting gas reserves is the most significant obstacle to investment in Bangladesh. Newly built manufacturing plants lie idle and large FDI projects, such as the USD 3bn Tata investment, have been turned away as energy security could not be provided by the government. This week the Board of Investment (BOI) Chairman Kamaluddin Ahmed clarified their position – the BOI would discourage investment in industries that rely on gas. He said, “We are sorting out how we can discourage investments -both foreign and local -- in gas-based industries to save the natural resources from quick depletion,". He added, "Investments in the services sector will be given priority over the manufacturing sector”.

Jamalganj

800 – 1,150

1,053

168

N/A*

Barapukuria

119 – 504

390

62

270

Khalshpir

257 – 480

685

110

480

Phulbari

140 – 350

426

68

360

Dighipara

328 – 455

200

32

140

2,754

441

1,250

On a more constructive note, he added, "We'll be able to attract more foreign investments after the new coal policy is in place”. The BOI stance reinforces our view that we must move forward without delay to use the country’s substantial coal reserves.

Prospects for Indian retailing and lessons for Bangladesh

The Coal Policy has been a long time in the making and has been through several iterations. We had previously written about the latest draft, which we felt was more pragmatic and dealt with many of the critical issues. It is high time for decision makers, the regulatory body and the stakeholders to come into consensus to resolve any outstanding issues and quicken the process of finalizing the policy. There has been a lot of discussion about the merits of underground mining versus open pit coal extraction. Perhaps the most lucid explanation of the necessity of open pit mining was given at a talk on July 31 at the Bangladesh Enterprise Institute by Mr Nazrul Islam. CEO of the Infrastructure Investment Facilitation Centre (IIFC). Among the key issues we would note that Bangladesh has five good quality coal reserves in the northern part of the country. Currently, only one mine (Barapukuria) is producing coal using underground mining method with production capacity of 1mn MT per year where the actual production in the previous year was 0.5mn MT. With Underground mining method we could recover only 441mn MT of coal from our five coal deposits while with the best combination of Underground and Opencast Mining the amount could be 1,418mn MT. For the maximum amount of coal recovery, we should focus on the best mining method based on the mine type. If we go for an underground method for all the mines then 1bn MT of coal will be left underground worth USD 100bn (Considering USD 100/MT). This has been summarized in the table on this page. These challenges could be overcome if the government or the mine developer develop the appropriate rehabilitation project. Along with short term compensation, the developer could also ensure long term packages for the dislocated population around the mining area. One suggestion at the BEI seminar was to give some stock of the mining company, preference in working in the mining company, encouraging the setting up of supporting industries etc.

Total

In conclusion, the key to Bangladesh’s energy and hence economic future lies in coal. Both this interim government and the next elected one should accelerate the coal development plan as fast as possible.

A report released on Sep 25 by Global Consulting firm McKinsey, ‘The Great Indian Bazaar: Organised Retail Comes of Age in India,’ suggests that the organised segment of the retail industry is expected to grow from the current 5 per cent of the total market to about 14-18 per cent of the expected USD 450 bn market by 2015. But they also caution global players waiting to enter the great Indian retail bazaar that a ‘cut and paste’ format of their stores elsewhere would not work here suggesting that “they need to have innovative formats based on where to participate in the retail value chain, which geographies to play in and what price points to offer. They also have to craft a customer-insight driven merchandising strategy and create an efficient retail operating platform. McKinsey’s retail report also talks about the uniqueness of the Indian shopper vis-a-vis the rest of the world: least loyal to a single retailer, dislike for pre-packaged fresh foods, willingness to pay more for convenience and services but not a premium price for a brand and demands ethnicity in apparel accessories. And, in the absence of quality control, information about the product and trust in retailers, brands serve as a proxy for all these factors. Of the current 204 million households in India, the report estimates that only about 13 million households have the income to patronise organised retail. The great news is that this relevant consumer segment will grow five-folds from 13 million to 65 million households in the next eight years but mom and pop stores would continue to be relevant across the country, in both small and large towns. The report also suggests retailing in India would require an approach that is distinctively different from the rest of the world. To achieve leadership position in the sector, players would have to integrate real estate into the business model, create an effective and scalable supply chain, increase basket size by shaping consumption, develop and retain talent, influence regulation to ensure healthy development of the sector and to de-risk margins. Mr Laxman Narasimhan, Director, McKinsey & Co and leader of the Consumer, Retail and Media Practice in India, stated that, “given the nascent state of organised retail and the

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29 September 2008 rapid evolution of the industry, it is imperative for retailers, manufacturers, real estate developers, logistics providers and partners along the value chain to work in a collaborative spirit.” Factors Barriers to FDI

Descriptions FDI not permitted in pure retailing Franchise arrangement allowed

Limited exposure to best practices

Lack of Industry Status

Government does not recognize the industry

Restricited availability of finance

Structural Impediments

Lack of ubanization

High Cost of Real Estate

Supply Chain Bottlenecks

Complex Taxation System

Implications Absence of global players

Poor transportation infrastructure

Restricts growth and scaling up Lack of awareness of Indian consumers Restricted retail growth

Consumer habit of buying fresh foods Adminstered pricing

Growth of small, one-store formats, with unmatchable cost structure

Pro-tenant rent laws

Wastage of almost 20%-25% of farm produce Difficult to find good real estate in terms location and size

Non-availability of government land, zoning restrictions

High land cost owing to constrained supply

Lack of clear ownership titles, high stamp duty (10%) Several segments like food and apparel reserved for SSIs

Disorganized nature of transactions

Distribution, logistics constraints - restrictions of purchase and movement of food grains, absense of cold chain infrastructure

Makes scaling up difficult

Long intermediation chain

High cost and complexity of sourcing & planning Lack of value addition and increase in costs by almost 15%

Differential sales tax rates across states

Added cost and complexity of distribution

Multi-point octroi

Cost advantage for smaller stores through tax evasion

Limited product range

vary from India is the greater openness in terms of FDI laws and labour laws and the lack of variability of tax regimes from state to state that India suffers from. Where there are likely to be similarities is in the cultural biases towards fresh produce from small food retailers or local markets. Also the challenges of finding land in major cities such as Dhaka and Chittagong. Bangladesh retail - organized and unorganized The retail industry in Bangladesh remains highly fragmented, which is a situation highly analogous to surrounding markets, such as India, about a decade ago. It is arguably not recognized as a significant industry and there is no clear regulatory body that directly oversees country-wide operations of different retailers. Moreover, there is minimal information available with regards to market size. Retail might be segregated into two segments – unorganized and organized. By unorganized retail one refers to informal low-cost retailers (i.e. local kirana shops, paan/beedi shops, convenience stores, pavement vendors etc). With a large population of 150 million, unorganized retail is one of the country’s largest employers. On the contrary, by organized retail, one refers to licensed retailers (i.e. those registered for sales and corporate taxes) – this would include supermarket, hypermarkets, departmental stores and retail chains, as well as privately owned large retail outlets. Organized retail in Bangladesh is presently at an embryonic stage of development and has negligible presence in the market to date.

Sales tax avoidance by smaller stores Multiple Legislations

Customer Preferences

Stringent labor laws governing hours of work, minimum wage payments

Limits flexibility in operations

Multiple licenses/clearances required

Irritant value in establishing chain operations; adds to overall costs

Local consumtion habits

Leads to product proliferation

Need for variety

Need to stock larger number of SKUs at store level

Cultural issues

Increases complexity in sourcing & planning Increases the cost of store management Lack of trainer personnel

Availability of Highly educated class does not consider Talent retailing a profession of choice Lack of proper training

Manufacturer No increase in margins s Backlash

Higher trial and error in managing retail operations Increase in personnel costs

Favorable demographics

Manufacturers refuse to disintermediate and pass on intermediary margins to retailers

The retail industry in Bangladesh presents tremendous potential, considering two of the largest drivers for growth within the sector are urbanization and income per capita. Recent demographic trends indicate a strong influx into the larger metro areas of the country, particularly Dhaka, Chittagong and Sylhet. Moreover, robust growth in national income over the past few years has been reflected by the rapid emergence of a middle-class population, bringing with it changing consumption patterns and a demand for organized retail, a phenomenon that was almost absent even decade earlier. We discuss this in more detail in the special focus article which is in the next section.

Source: Market Participants, Fitch

The fragmented nature of Indian retail Experiences in the developed and developing countries prove that performance of organised retail is strongly linked to the performance of the economy as a whole. The table below from an analysis by Indian consulting firm CII gives a valuable perspective on some of the retailing challenges that Bangladesh might face. Where retailing in this country will

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29 September 2008

S Adeeb Shams, Research Associate [email protected]

Special Focus – Retail Bangladesh’s grocery retail industry is at a nascent stage – a market that remains highly fragmented with few organized branded retailers penetrating the market. Informal unorganized formats dominate the market, with the majority of the 150 million population preferring to shop at their local low cost kirana and small paan/beedi stores. Organised retailers, Agora, Meena Bazaar, Nandon and PQS, to name the leading four, have concentrated their focus so far, on more affluent shoppers, in upper class areas. However this is changing with some operators spreading their wings with aggressive expansion plans and varied formats tailored to wider socio-economic groups catering for their tastes and buying habits. India provides a useful benchmark and in many areas has similar characteristics to the Bangladesh market, albeit at a later stage in its evolution - a market characterized, by a large and growing population, increasing disposable incomes, a fast growing middle class and changing buying habits. Many Indian domestic players have managed to successfully roll out formats country wide. Larger global players, such as Walmart and Tesco are entering India via JVs with local players. Regulatory, real estate, human resource and supply chain issues continue to challenge, but none the less a market forecast to evolve into a USD 450bn in the next decade provides growth prospects that are unachievable outside emerging markets. In this week’s Special Focus, we evaluate the prospects of the grocery sector in Bangladesh – key drivers, market characteristics, key constraints and prospects for growth. Favorable demographics The two key demographic drivers for growth are urbanization and income per capita. Recent demographic trends indicate a strong influx into the larger metro areas of the country, particularly Dhaka, Chittagong and Sylhet. Consistent GDP growth (c. 6%) over the past few years has been reflected by the rapid emergence of an urban middle-class population, bringing with it changing consumption patterns and a demand for organised retail, a phenomenon that was almost absent even a decade earlier. The largest percentage of Bangladesh’s population consists of those within the working age group (25-59) and the creation of a sizeable middle-class would inevitably induce greater demand for organized retail. As organised retail becomes more prevalent in the country, with rising incomes and the advent of western consumption patterns (a trend that embraced surrounding markets such as India and Thailand long ago), one would expect Bangladesh to follow.

Current retail scenario – no market leader Organized retail in Bangladesh is primarily concentrated in Dhaka. The past few years have seen the emergence of different retailers (Agora, Meena Bazaar, Nandon and PQS), but none of these chains have managed to scale to more than five outlets, restrained by supply chain, logistical, regulatory and real estate constraints. Additionally the key players have catered to a very niche market of high-income individuals. However in the last six months at least two players have reported they have very aggressive rollout plans to expand, with some new entrants, such as ACI signalling that they are planning to enter the market on a significant scale. Relatively low incomes Bangladesh’s GDP per capita is approximately USD 470, making it one of the poorest nations in the world. A majority of consumers have relatively low disposable incomes which reflect on the size and nature of the average basket at a grocery store. Staples and food-related essentials account for a considerable portion of this basket. This almost certainly makes price the most significant factor affecting a consumer’s decision between two retailers. However, this trend has evolved in recent years with the introduction of electronics retailers (global brands such as Sony and Philips) in district towns, outside of the more developed metro areas of Dhaka, Chittagong and Sylhet. This is an indication of the gradual emergence of a middleclass with an increasing percentage of incomes now dedicated towards non-essentials such as electronics. Greater urbanization coupled with rising middlemiddle-class Urbanization has greatly contributed towards the growth of the organized retail sector in Bangladesh. Moreover, there are a greater number of well-paid corporate jobs particularly in Dhaka with a trend towards longer working hours and less personal time. This is further re-enforced by higher workforce participation by women and a preference for convenience shopping.

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29 September 2008 Existing high service retail network Even though of a disorganized nature, Bangladesh’s retail sector is fairly large as a result of the country’s demographic patterns, income levels and consumer preferences. Informal credit is extremely prevalent, making it necessary for each retailer to create a certain degree of rapport with customers who visit regularly. This rapport is based completely on trust and often takes long periods of time to build. The market is such that consumers tend to be loyal to their neighborhood retailer and therefore, reluctant to switch to other stores. High traveling costs – low auto penetration The relative cost of traveling for a majority of the population is quite high and a very small portion of the population consists of consumers who are car owners. Bulk shopping is restricted to such car owners. As such the average basket size in regular unorganized retail tends to be very small. The effects of a gradual movement towards organized retail and increased incomes, will not only be characterized by larger basket sizes, but also a greater degree of diversification within products (a greater proportion of processed food such as jam, ketchup etc) within those baskets. Existing store store formats The different type of retail stores in Bangladesh might be classified into four broad groups, ranging from the very small open-air temporary store to fully air-conditioned western-type supermarkets.

Roadside shops: This type of retailer is most prevalent. Store sizes are generally very small (between 50 and 100 square feet). Products consist of basic essentials. Imported items are rarely available, with the exception of low-quality products from border adjacent areas of India. Even though almost all markets in rural areas consist of stores of this category, such stores are also seen in the capital.

Municipal corporation markets: These stores tend to be more prevalent in semi-urban and urban areas of Bangladesh and are still the most popular source for shopping amongst a large percentage of the market within their areas. Businesses are usually arranged and segregated according to the kind of commodities they are carrying. For example, within the same market, there would be different stores each for fish, meat and vegetables. Selected popular imported products are available.

Convenience stores: These have traditionally been located in the more affluent urban areas, but they have spread to almost all areas of the larger cities, such as Dhaka, Chittagong and Sylhet. With rising incomes, this type of store is beginning to become popular in district towns as well. These outlets usually provide a wide range of imported items, along with high-quality local products.

Supermarkets: The past decade has seen the advent of supermarkets, i.e. stores that fall into the organized retail category, in different large metropolitan cities, particularly in Dhaka. The objective of these stores was to cater to urban elites and expatriates in the capital. However, recently in the past few years, there has been a growth in the number of organized retail supermarket outlets, although these stores still account for a negligible portion of the entire retail sector.

Currently this segment is characterized by quite a few one-off stores, as well as a few supermarket chains (Agora, Meena Bazaar, Nandon and PQS). Their presence is primarily restricted to Dhaka and the highest number of outlets that a chain presently has is five. Real estate constraints Bangladesh is the most densely populated country out of the top ten most populous countries in the world - a large population, coupled with a very small land area – for example, the population of Bangladesh is approximately half of that of the US, even though its area is roughly one-ninetieth of it. Land is by far the country’s scarcest resource. There is yet to be a full service hypermarket anywhere in Bangladesh. The most obvious locations for such stores presently would be the locations where the current organized retailers are primarily concentrated, i.e. areas such as Gulshan, Banani and Dhanmondi etc. Considering the rate at which the cost of land is rising and also the fact that there is minimal unutilized land, it would practically be impossible to acquire large tracts of land for hypermarkets in such areas. One option might be purchasing (fully or partially) the government-owned markets such as Gulshan Markets 1 and 2, or New Market. Even if land is available, it is often very difficult to assure transparency and accountability with regards to legal title. One possible means of making land available, is for the use of government-owned unutilized land – there are many large sites in urban locations. One viable option might be negotiating with the government into taking up a long-term lease of government-owned land using them for larger retail outlets. Regulatory constraints The government recently introduced a law whereby all retailers are required to have a ‘shop license’. However, such initiatives are yet to bear fruit and retailers have stated that despite taking up such an initiative that promises to make the business itself more accountable, the government has failed to provide any written guidelines. Lack of legislation with regards to retail is inevitably one of the greatest barriers that retailers face towards growing at a rapid pace. Fragmented supply chain The supply-side market is largely unorganized and generally controlled by syndicate of middlemen who control pricing and supply. Prices of groceries such as fresh vegetables at most retailers in Dhaka increase two to three-fold of the price at which the farmers sell the same products. This stems from a failure of existing retailers in the market to gain a stronger foot-hold on the supply chain and eliminate the role played by these middlemen (wholesalers). Sourcing directly from suppliers would not only help reduce the final price of the product (which will be beneficial to consumer), but it would also enable the retailer to raise its margin (the retailer would be able to compensate the absence of the wholesaler, by raising price). Generally, existing players have not sourced directly from suppliers, due to scale issues – in order to break the current status quo and disintermediate the middle man and provide

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incentives and economic security to farmers, retailers need to be of sufficient scale. The maximum number of outlets a chain presently has is five (Meena Bazar) and many contend that existing businesses are not scalable enough to introduce such pioneering initiative. However, some retailers are finally starting to source some of their products directly from suppliers. Nandan and Meena Bazaar are presently acquiring some selected produce directly from farmers. As is the case in India, developing a strategy which provides effective management of the supply chain- a ‘farm to fork’ strategy – is a critical success factor. We would expect that players with sufficient integration into the supply chain, with existing agro related businesses or through joint ventures – infrastructure and market presence - are at a significant competitive advantage to those that depend on the imperfections of the existing supply side market, Complex logistics Bangladesh has poor infrastructure with regards to storage and this in turn hinders efficient supply chain management. Most stores do not have a feasible plan laid out when it comes to storage and some chains have separate warehouses with each store. Decentralised independent cold storages for each outlet might is cumbersome. The overall cost of storage is considerably lowered for retailers if they receive reliable deliveries from selected wholesalers to a centralized distribution center, rather than having to deal with multiple wholesale markets in daily intervals. For chains to grow and have sizeable presence throughout different metropolitan areas of the country, it is imperative that chains introduce centralized cold storages and benefit from economies of scale. Labor and manpower challenges Since organized retail is at such a nascent stage of development, a shortage of trained personnel is a major barrier towards rapid growth of the sector. The workforce lacks sufficient education and specialization in retail service provision. One would expect the situation to improve with the expansion of the existing chains and the introduction of new entrants. There are no programs related to supply-chain management per se at universities in Bangladesh. One might expect relevant programs to become institutional once there are international players in the market – the introduction of international players would induce a requirement for management trained with expertise in such relevant areas. Conclusion Retail growth in Bangladesh is expected to grow at a rapid pace in the coming years, with rising incomes, shifting lifestyles and complimentary demographic trends. While the macro picture seems compelling the challenge remains to develop a viable scalable business model and execute an effective strategy to penetrate the 150 million strong population, cater for a diverse social and regional demographic, effectively manage supply chain and logistics, overcome infrastructure and regulatory constraints and the scarcity of real estate in urban centres.

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29 September 2008

Stock Market Weekly Market news

DSE performance: 52 weeks weeks

•

DSE market capitalisation crosses BDT 1 trillion mark

•

DSE, NBR differ on tax exemption on GP IPO placement

•

GP extends time for private placement

•

Investor fined BDT10mn for insider trading

•

DSE to upgrade its trading capacity by year-end

•

Government plans to increase GDP growth projection to 7%

DSE performance: 30 days

Regional stock market performance (last week)

Market summary

Valuation snapshot

Index performance Opening of this week Closing of this week Change within a week (%) Change within a week (Point)

Capitalization and turnover Number of Trading Days Market Capitalization (USD bn) Total Turnover (USD mn) Daily Avg. Turnover (USD mn) Total Volume (mn) Daily Avg. Volume (mn)

Weighted avg. P/E Ratio* This Week 21.33 Last Week 20.51 % Change 4.0% *Weighted on Market Cap.

DSE General Index

DSE 20

2,838.5 2,966.8 4.5% 128.3

2,383.7 2,466.1 3.5% 82.4

This Week

Last Week

5 15.18 306 61 161

5 14.47 235 47 130

32

26

Issues Advanced Declined Unchanged Not Traded

This Week 150 80 13 43

% Change 4.9% 30.3% 30.3% 24.2% 24.2% Last Week 65 172 8 43

Banks Cement Ceramic Engineering Food & Allied Fuel & Power Insurance Investment IT Jute Miscellaneous Paper & Printing Pharmaceuticals Service & Real Estate Tannery Textiles

Sector P/E Apr-08 May-08 22.2 22.6 14.7 17.6 43.7 42.7 38.9 41.4 28.2 28.5 25.8 26.2 28.1 32.4 64.9 65.2 18.4 17.6 16.4 16.0 23.0 25.9 9.2 9.5 26.7 29.8 20.5 19.5 25.1 23.1 14.9 14.4

Jun-08 21.7 12.4 42.0 39.1 13.2 23.6 26.9 53.1 20.0 16.0 23.2 9.2 28.1 20.8 19.8 15.2

Jul-08 19.2 11.2 50.3 38.4 19.3 16.1 22.8 33.5 20.3 16.3 25.2 7.9 25.6 20.5 21.3 16.3

Source: Dhaka Stock Exchange

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29 September 2008 Weekly Stock Market Commentary It was an eventful week for the market before it closed for nine calendar days. The long recess includes two weekends and an extended Eid vacation in between. The market will open on October 5. Defying all the turmoil in the global financial market during the week, the DGEN gained on each of the trading days during the week and ended with a weekly gain of 4.52%. The market reached a very important milestone this week – the market capitalization (stocks and government bonds combined) exceeded BDT 1 trillion mark on Monday. At close of trading on Thursday the capitalization exceeded USD 15bn. The equity market capitalization was BDT 8,171bn (USD 11.9bn) and there was BDT 2,224bn (USD 3.2bn) worth of fixed income securities (mostly government bonds that do not trade). The government bonds have been listed in the recent years.

The market capitalization has grown on average 50% annually in the last seven years. The equity market capitalization grew by on an average 46% a year during that time. Though increase in prices of existing securities contributed substantially to this growth, there have been a lots of new listings and issuances of right shares and bonus shares by existing companies. Bangladesh capital market should maintain its high growth as long as corporate earnings, which increased 48% in the first half of 2008, do not drastically fall. Earlier, a lack of supply of securities was considered to be the main reason behind the underdevelopment of Bangladesh capital market. But now the pipeline of new issuances looks pretty robust, which will contribute to the growth of the capital market. First, the telecom sector will be the strongest driver of capital market growth in the next three years. In addition to the listings of Grameenphone, the largest, and Aktel, the third largest mobile phone operators in the country; three WiMAX, three Interconnection Gateway, three International Gateway , and one Internet Gateway companies will get listed in the next three years. Such listing will occur as the Bangladesh Telecom Regulatory Commission (BTRC) requires all recent licensees to get listed within three years as per the licensing agreements. Second, the banking sector is expected to continue its high growth and banks will keep relying on the capital market for their tier I and tier II capital. We estimate that the banking

sector alone will account for 15% growth of the capital market. Third, we expect to see changes in the underdeveloped Insurance sector of the country. Currently, the insurance companies are tiny and undercapitalized. The new insurance ordinance is expected to take effect shortly. Under the new ordinance, the minimum paid up capital of life insurance company is BDT 300mn (USD 44mn). It is BDT 400mn (USD 58mn) for a general insurance company. The ordinance will also change the regulatory environment of the sector and is expected to add momentum to its growth. Therefore, many insurance companies are expected to raise capital from the market. Fourth, we expect the government initiative to privatize state owned companies through direct listing to continue. The government has already corporatized many of the large state owned entities in banking, telecom, airlines and other sectors. Eventually, many of these corporatized entities will get listed. The high drama involving the IPO of Grameenphone continues. In the previous edition, we commented that the Grameen IPO may not happen this year. Now it is almost certain. Earlier, the SEC chairman commented that the SEC has not received all of the information it needed to approve the IPO. Furthermore, the CEO of DSE stated that Grameen should change the denomination of its shares. This week, the biggest blow came from the National Board of Revenue (NBR) when it commented that the pre IPO placement of Grameen will not be considered a public offer for purposes of the 10% tax benefit provided to companies who go public, the incentive that may have prompted Grameen to get listed in the first place. According to NBR, at least 10% of its total share capital has to be offered through IPO for a company to be eligible for such tax benefit. Grameen planned to issue 5% of the shares through pre IPO placement and 5% through IPO. In the meantime, the fundamentals of Grameenphone continue to deteriorate. The company is experiencing decline in its revenue and net profit and its market share is falling faster than expected. In September, it hardly acquired any new subscribers. Maybe all those factors resulted in poorer than expected response from institutional investors during the bidding for Pre IPO placements. To add insult to the injury, bickering between major existing shareholders surfaced recently. Also the CEO of the company has declared that he will resign by the end of the year. His stint was supposed end in 2010.

Stock Market News DSE to upgrade its trading capacity by yearyear-end The Financial Express, Monday, September 29, 2008

The Dhaka Stock Exchange (DSE) is set to upgrade its automated trading system with its plan to expand capacity. The country's prime bourse has already undertaken a project to upgrade the electronic trading system, making available an electronic “order book” facility, to be implemented in phases. In the “order book” system, member firms of the DSE execute orders at a given price by pushing a button under the automated trading system. Actual prices, rather

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29 September 2008 than bids and offers, are being posted in the order book, making trading fairer. After upgrading the current trading platform, the DSE will be able to handle 0.15 million transactions per day (from the existing capacity of 0.1 million) by December this year and 0.25 million by 2010. Currently, the bourse handles 50,000 to 60,000 transactions on an average per day. http://www.thefinancialexpressbd.info/search_index.php?page=detail_news&news_id=46831

AT CAPITAL RESEARCH Grameenphone however did not specify any new deadline for the PPO. There is a rumour in the capital market that Grameenphone extended the time for participating in PPO as the offer received poor response from the local institutional investors. People close to the matter said that only a handful of local institutions -- including Trust Bank, Prime Bank, ICB, AIMS of Bangladesh, IDLC and Lanka Bangla -- participated in Grameenphone's PPO before its deadline ended last week. The highest offer for each Grameenphone share during the PPO was BDT 12, while the lowest was BDT 3. http://www.thedailystar.net/story.php?nid=56371

Investor fined BDT10mn for insider trading The Daily Star, Saturday, September 27, 2008

The capital market regulator has fined Arif Ahmed, an investor and a relative of some sponsor directors of Popular Life Insurance, to the tune of BDT 10mn( USD 0.15mn) for his alleged involvement in stock market manipulation and insider trading. The Securities and Exchange Commission (SEC) also fined three directors of Popular Life Insurance a total of BDT 2mn, a shareholder BDT 0.5mn, and the wife of Arif Ahmed BDT 0.5mn on charges of insider trading. Insider trading is a form of share transaction carried out for profit on the basis of price sensitive information that has not been disclosed in public. The fines, imposed after an investigation by the stock market watchdog, must be paid to the SEC within the next 15 days.

DSE market capitalisation crosses BDT BDT 1 trillion mark The Daily Star, Tuesday, September 23, 2008

The market capitalisation of Dhaka Stock Exchange yesterday reached over BDT 1 trillion for the first time on the trading debut of First Security Bank shares. Such capitalisation was BDT 0.99 trillion on the previous day. Market capitalisation represents the aggregate value of a company or stock. It is calculated by multiplying the number of shares outstanding by the current price on each share. First Security Bank joined the stock market with an issue size of BDT 1.15bn. http://www.thedailystar.net/story.php?nid=56097

DSE, NBR differ on prepre-IPO placement The commission also forfeited BDT 1.9mn that a Popular Life Insurance director gained as profit by selling shares in the restrictive period. The SEC formed a probe body in March to find out why share prices of Popular Life reached BDT 5,000 (USD 73) each in March from BDT 811 (USD 11.8) in June 2007. The team found Arif to be the brother of four sponsor directors of Popular Life: Hasan Ahmed, Kabir Ahmed, Farzana Zahan Ahmed and Noorjahan Ahmed, and a cousin of Shabbir Ahmed, another sponsor director. From February 2007 to August 2007, Arif bought a total of 181,150 shares of Popular Life Insurance through his nine trading or BO accounts. Of the shares, the probe body found that 10,750 were bought just before the disclosure of pricesensitive information, which indicates insider trading. During the seven-month period, he sold 50,350 shares of Popular. http://www.thedailystar.net/story.php?nid=56506

GP extends time for private placement The Daily Star, Thursday, September 25, 2008

Grameenphone, the country's largest mobile phone operator, has extended the deadline for local institutional investors to participate in its private placement offering (PPO). “Local institutional investors need to be given adequate time to do due diligence and allocate funds for the bidding. Under the current challenging global capital market conditions in which international investors are hesitant to commit to new investments, it is important to ensure that potential investors in Grameenphone are given adequate time to make investment decisions,” Grameenphone quoted its CEO Anders Jensen as saying in a statement. “We are working with the Securities and Exchange Commission (SEC) to expedite the matter,” he also added.

The Financial Express, Tuesday, September 23, 2008

The Dhaka Stock Exchange (DSE) authority said that the stand of National Board of Revenue (NBR) on disallowing the 10% corporate tax benefit on pre-IPO placement would discourage the mobile companies to go public. DSE officials expressed their fear when Chairman of National Board of Revenue (NBR) Abdul Mazid visited the country's prime bourse on the day and wanted to know the officials’ views on the Grameenphone's (GP) initial public offering. The NBR states that a company will not get a 10 per cent corporate tax cut if it raises funds through pre-IPO or private placement. DSE Senior Vice-President Saiful Islam said, "The decision will discourage other mobile companies to come in the capital market." In the wake of the NBR directive, the country's largest mobile phone company is likely to halve its proposed initial public offering (IPO) size from USD 300mn to USD 150mn, market sources said. Of the total revised size of the GP IPO, USD 100mn may be allotted to the public, USD 15mn to micro credit borrowers of GP, USD 10mn to GP staff and the rest USD 25mn to local financial institutions and mutual funds, according to the market sources. http://www.thefinancialexpressbd.info/search_index.php?page=detail_news&news_id=46332

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29 September 2008 DGEN Performance LTM

Turnover leaders (All figures in mn) BDT 1,460 TITAS Gas 1,338 Beximco Pharma 1,108 ACI Ltd 1,104 BEXIMCO 994 Grameen1: Scheme 2 839 AIMS First Mutual Fund ICB AMCL 2nd NRB 763 Mutual Fund 758 Summit Power 484 Lankabangla Finance 435 Square Textiles

DGEN Performance YTD

Best performers* USD 21.3 19.5 16.2 16.1 14.5 12.2 11.1 11.1 7.1 6.3

% Change 60.0 39.7 38.2 37.9 33.6 30.5 26.7 24.9 22.2 21.8

Glaxo Smithkline Beximco Fisheries Saleh Carpet Golden Sons Shinepukur Holdings BEXIMCO BSC Summit Power BD Welding Electrodes BD Thai Aluminium

Worst performers* % Change Agni Systems Ltd -16.9 Safco Spinnings -12.7 BLTC -9.9 Perfume Chemicals -9.6 MAQ. Paper -9.3 Padma Printers -9.1 BCIL -8.8 Desh Garments -7.5 BDCOM Online Ltd -7.4 United Insurance -6.7 *By closing price Source: Dhaka Stock Exchange

Source: Dhaka Stock Exchange

Market cap. by sector* Banks Fuel & Power Pharmaceuticals Cement Insurance Miscellaneous Engineering Foods Textile Tannery Service & Real Estate IT Ceramics Paper & Printing Jute Total

52.6% 12.2% 10.4% 5.7% 5.7% 3.0% 2.6% 2.4% 2.1% 1.5% 1.0% 0.5% 0.1% 0.1% 0.03% 100%

Correlation with other Indices*

S&P 500 S&P500

Sensex

NIKKEI 225

KSE 100

SSECI

FTSE 100

HangSeng

DSE

1

Sensex

0.49

1

NIKKEI225

0.40

0.50

1

KSE100

0.13

0.31

0.10

1

SSECI

0.28

0.41

0.22

0.04

1

FTSE100

0.81

0.48

0.41

0.21

0.38

1

Hangseng

0.65

0.58

0.46

0.09

0.50

0.73

1

DSE

0.10

0.14

0.09

0.06

0.03

0.13

0.11

1

* Based on the last 80 months’ USD returns Source: AT Capital Research

*As of July 31, 2008

Research Team Professor Jahangir Sultan Senior Advisor [email protected]

Shahidul Islam Investment Manager [email protected]

Rashed Hasan

Syed Najibullah

Research Associate

Research Assistant

[email protected]

[email protected]

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29 September 2008

Economics Selected macroeconomic indicators

2323-SepSep-07

Market news

3030-JunJun-08

2323-SepSep-08

Forex reserves (USD mn)

5,028.23

6,148.82

5,741.93

USD-BDT average rate

68.7100

68.5297

68.5187

6.91

4.78

8.91

Call money rate (%)

•

consumers

• AugAug-07 Remittances (USD mn)

732.98

7,914.78

-0.06

55.64

32.39

JulJul-07

JulJul-08

20072007-08

1,546.00

2,071.30

21,629.00

14.34

33.98

26.07

Annual percentage change

Exports (USD mn)

JunJun-07

JunJun-08

20072007-08

1,218.03

1,469.51

14,110.80

9.52

20.65

15.87

Annual percentage change

AugAug-07 Tax revenue revenue (USD mn)

AugAug-08 482.83

6,906.55

22.55

23.67

27.06

Source: Selected Indicators by Bangladesh Bank, 24 Sep 2008

FDI inflows (USD mn) Region

2005

Bangladesh India South Asia World

2006

•

FDI inflow drops

•

Bangladesh Bank raises T-bill rates to limit credit growth

•

BGMEA eyes USD 25bn exports by 2013

Latest Treasury yields

20072007-08

432.55

Annual percentage change

Government plans to increase GDP growth projection to 7%

20072007-08

470.95

Annual percentage change

Imports (USD mn)

AugAug-08

Falling global commodity prices fail to benefit local

2007

845

793

666

7,606

19,662

22,950

12,136

25,780

30,620

958,697

1,411,018

1,833,324

Auction date

Tenor & security type

Weighted average yield

22-Sep-08

91-day T-bill

7.83%

14-Sep-08

182-day T-bill

8.05%

22-Sep-08

364-day T-bill

8.55%

16-Sep-08

5-year T-bond

10.60%

2-Sep-08

10-year T-bond

11.72%

9-Sep-08

15-year T-bond

12.14%

23-Sep-08

20-year T-bond

13.07%

Source: Bangladesh Bank

S Adeeb Shams Research Associate

[email protected]

Source: The Daily Star

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29 September 2008 Economic News Falling global commodity prices fail to benefit local consumers The Financial Express, Friday September 26, 2008

Consumers have not been benefitted by the falling global commodity prices, as retailers are yet to have made adjustments with wholesale rates, according to a government report. The quarterly Food Situation Report (April-June), prepared by the Food and Disaster Management Ministry, says the difference between retail and wholesale prices has widened in recent past. In Dhaka, retail and wholesale prices have moved in the same direction in the last July-June period with percentage margins ranging from 4% to 8% for rice and 4% to 11% for wheat. The report also says that margins for both rice and flour have gone up in May-June despite a general decline in prices. According to Bangladesh Bank Chief Economist Mustafa K. Mujeri, it is not surprising to see very little reflection of falling global commodity prices within the local market, as traders and importers are benefited at the expense of consumers. Dr. Mujeri said the government had waived duties on many products following request from importers and traders in the past, but hikes in the price of those products could not be halted. Consumers Association of Bangladesh General Secretary Quazi Faruque said blaming retailers is not the solution to the government, as wholesalers are also to be blamed as they dictate prices in the absence of proper price regulation by the government. The Commerce Ministry plans to establish a permanent price monitoring cell to monitor the price situation. http://www.thefinancialexpressbd.info/search_index.php?page=detail_news&news_id=46556

Government plans to increase GDP growth projection to 7%

Meeting sources said Bangladesh Bureau of Statistics officials expressed their reservations about revising GDP growth after just two months into the fiscal year. Bangladesh Bank officials on the other hand, believed that all economic indicators were positive enough to chase a GDP growth target between 6.5 and 7%. According to economist Professor Abu Ahmed, even though 7% GDP growth was positive news for the country, sustainable economic growth will be down to a positive political situation and the new government's economic agenda. http://www.newagebd.com/2008/sep/27/front.html

FDI inflow drops The Daily Star, Thursday September 25, 2008

Bangladesh received USD 666mn worth of foreign direct investment in 2007, a 16% fall from the previous year's amount of USD 793mn, although global FDI marked a 30% rise during the same period, according to a global investment report. The United Nations Conference on Trade and Development prepared the World Investment Report 2008 titled "Transitional corporations and infrastructure challenge". Statistics from the report indicate that Bangladesh has slipped to 121st this year in terms of inward FDI performance index from a rank of 120th last year. The Board of Investment launched the report at a press conference at its office in Dhaka. Professor of Economics at Jahangirnagar University M Ismail Hossain presented the report at the event. Political uncertainty, indecision over some big proposals and infrastructural constraints were identified as the major factors that influenced the fall in FDI. Of Bangladesh's USD 666mn of FDI flows, textiles received the highest amount of USD 102mn, followed by telecom sector's USD 89mn, trade and commerce USD 93mn and gas sector USD 71mn.

New Age, Saturday September 27, 2008

http://www.thedailystar.net/story.php?nid=56367

Financial planners are upbeat about revising this year's economic growth projections by half a percentage point to 7%, because of good paddy harvest and outlook, coupled with declining global commodity prices. The revision was decided at a recent meeting of medium-term macroeconomic framework (MTMF) working group with Finance Secretary Mohammad Tareq in the chair. The budgetary projection for GDP growth in the 2008-09 fiscal year is 6.5%, up from 6.2%, which was achieved in the previous fiscal.

Bangladesh Bank raises TT-bill rates to limit credit growth New Age, Tuesday September 23, 2008

Bangladesh Bank has increased interest rates on treasury bills to keep credit expansion and inflation in check, according to officials. The central bank raised its key policy interest rates by between 0.30 and 0.50% for two t-bills after a period of over three years. http://www.newagebd.com/2008/sep/23/front.html

A bumper boro rice harvest and good prospects for the next aman crop have boosted the mood of policy planners for projecting higher growth, according to a high official of Finance Ministry. Declining prices of food and fuel oil in global markets, positive trends in import-export trade, high growth in remittances and limited impact of recent floods on the crops are to accelerate economic growth, according to the official, while defending the upward revision of the growth projection.

BGMEA eyes USD 25bn exports by 2013 The Daily Star, Thursday September 25, 2008

Bangladesh Garment Manufacturers and Exporters Association (BGMEA) has promised to shoot up the country's exports to USD 25bn by 2013, provided the new elected government and all concerned can maintain political stability and ensure correct economic policies.

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BGMEA President Anwar-Ul-Alam Chowdhury Parvez expressed his gratitude to the caretaker government for its role in ensuring 525 days that have been free of hartals to operate the USD 10.7bn industry smoothly. He stressed the need for synergising public-private initiatives in an attempt to improve the country's image, develop human resources and improve infrastructure and economic zones by encouraging private investors with the right policy initiatives.

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Sector News Agriculture United Airways goes international Govt bans import of Chinese milk

The Daily Star, Thursday September 25, 2008

New Age, Monday, September 22, 2008

Government has banned the procurement, sale and stocking of powdered milk of three Chinese brands- San Lu, Sun Care and Yashili- because of chemical contamination that caused four deaths in China. The decision came after the Chinese authorities informed Bangladeshi government about the presence of harmful substances in the milk of these companies. No powdered milk of Chinese origin can be unloaded at the seaports without any melamine testing. Melamine is the toxic particle that has caused this crisis. In China, so far, 6,244 children have become ill and four died. China accounts for less that 10% of country’s total milk imports. What is alarming is that BSTI, the local standard testing agency, lacks the necessary equipments to carry out the test. The commerce ministry instructed BSTI to take legal action against two local importers for selling powdered milk without certification. http://www.newagebd.com/2008/sep/22/front.html#3

Aviation Best Air flies to KL, Singapore from next month The Daily Star, Friday September 26, 2008

Local private airliner Best Air will introduce flights to Kuala Lumpur and Singapore from early October, according to officials of the carrier, according to M Haider Uzzaman, Chairman of the company. There will be two weekly return flights to Singapore, whereas the carrier will fly to Kuala Lumpur four days a week. Best Air officials said they took the decision to introduce these particular routes as GMG Airlines has recently suspended its operations to Kuala Lumpur. The current international destinations of Best Air are Dubai, Colombo, Male and Bangkok. http://www.thedailystar.net/story.php?nid=56530

Air Asia may fly from Dhaka The Daily Star, Tuesday September 23, 2008

The government is likely to allow Kuala Lumpur-based low cost carrier Air Asia to operate flights from Dhaka, according to a government official. A meeting was scheduled where a final decision was to be made if the Kuala Lumpur-based airliner would be allowed to operate on the Kuala LumpurDhaka route. According to an inter-ministerial committee recommendation, such low cost carriers are generally required to first operate from Chittagong, rather than Dhaka. The only low cost carrier that operates in Bangladesh is Air Arabia, which flies between Chittagong and Sharjah, six days a week.

United Airways inaugurated international operations with a flight from Dhaka to Kolkata on Wednesday. Chairman and Managing Director of United Airways Captain Tasbirul Ahmed Chowdhury, Directors and other senior officials of the company were present at the occasion. The airline will initially operate a daily flight on the route, even though there are plans of expanding services to other regions of India, such as Mumbai, Chennai and Guwahati. http://thedailystar.net/story.php?nid=56395

Banking ATC Comment This week one of the most prominent news on the banking sector is that some banks have increased their deposit rates; few others reduced their lending rate. It is expected that such moves will narrow the interest rate spread – the difference between the deposit rates and lending rates. It is generally perceived that the banks enjoy “high interest rate spread” in Bangladesh. It is often a topic for heated debate on TV talk shows. Bankers generally take one side— that is the interest rate spread is just right-- and the business persons take the other—the spread is too high. Even some business persons go to the extent of suggesting that Bangladesh Bank should intervene to reduce the spread. Many of the commentators are fond of comparing the interest rate spread in India, Pakistan and Sri Lanka with that in Bangladesh. We think that many of the comparisons are unfair. First, credit risk in loans account for bulk of the difference between the deposit rates and lending rates. If the credit risks in two countries are not same, we should not expect interest rate spread should be the same. Second, the maturity profiles of the deposits and loans of a banking sector of a country can differ significantly from those in other countries. The banking system of a country that runs higher refinancing risk or reinvestment due to higher mismatch in maturities of loans and deposits is expected to command higher interest rate spread. Third, the banks need to load their operating cost in their lending rates. As the operating costs differ from one country to another, the load attributable to the operating cost should also differ. Last, the methodology to calculate interest rate spread may differ among countries. For instance, the ratio of Cash Reserve Requirement (CRR), the percentage of bank deposits that a bank needs to maintain with central bank in non-interest bearing account and the Statutory Liquidity Reserve (SLR), the mandatory investment of banks in government securities, differ among countries. As we do not know exactly how all those factors affect the banking sector in different countries, we are not in a position

http://www.thedailystar.net/story.php?nid=56095

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29 September 2008 to say if interest rate spread in Bangladesh is effectively higher than that in its neighbors. But intuitively we do not see a strong reason why the interest rate spread in Bangladesh should be significantly higher than that in its neighbors. There is enough competition in the market. Forty nine banks are enough number of players in any industry to ensure enough competition and erosion of excess profit. We think the source of perception or rather misperception about interest rate spread is elsewhere. It is the high profit numbers of the banks that have been making the headlines of business pages of the newspapers in the recent years. Many people think that the banks are making billions of Taka profit by squeezing their customers. But one should not look at the absolute amount of profit. It is all about how much return on equity the banks are generating. The return on equity of the banks may not be higher than that of other successful sectors in Bangladesh such as Textile. If the return on equity is relatively high, it is most likely due to under reporting of profit in other sectors. Banks are unlikely to under report profits and evade taxes as (a) the banks are heavily regulated and supervised by Bangladesh Bank and (b) their corporate governance standard, thanks to initiatives taken by Bangladesh Bank, is relatively better that that in other sectors. We believe that it is the lack of risk based loan pricing, not the high pricing, is the problem in Bangladesh. The banks here lack in their ability to quantify risks. The phenomena of risk rating or risk grading and risk based pricing are new here. Some of the local banks apply single interest rate to all its borrowers in the same industry or same tenor. If the loans are rated properly, the rating will reflect the probability of default and probable loss of the financial institution if a loan is defaulted. If the loans are priced based on proper rating, the good borrowers will get loan cheaper. They will not have to shoulder the cost associated with probability of default and loss given default of a bad customer. Therefore, we think that the debate should be whether the financial institutions are inconsistent in loan pricing. Are they charging lower interest rates to better rated customers? As the country adopts Basle II norms of banks’ capital adequacy, the need for quantifying the risks of the loans and risk based pricing will be of paramount importance. Foreign banks to use services of NGOs to disburse farm credit The Financial Express, Saturday, September 27, 2008

Bangladesh Bank (BB) has made agriculture credit disbursement mandatory for all commercial banks and also introduced a new credit mechanism of revolving crop credit in view of stimulating production, reports UNB. The practice of direct lending had been apparently absent since the inception of Financial Sector Reform Programme (FSRP) undertaken in 1990, resulting in the freedom of the commercial banks whether they would provide agriculture credit. But the recent experience of global food crisis had made it clear that there was no alternative to investment in agriculture to face the challenge of food security in the global price situation. Considering the situation, the high-powered

Agricultural Credit Monitoring Committee comprised of representatives from the agriculture ministry and commercial banks decided on September 16 to make the agriculture credit mandatory and introduce the revolving crop credit system considering the food situation. The central bank deputy governor, Nazrul Huda, said the foreign commercial banks, operating here without having adequate branches, would use the NGO networks to disburse agriculture credit and they also would have to ensure whether the NGOs using the fund only for agriculture credit. The new mechanism of revolving crop credit limit would be for a three-year term to relieve farmers of fresh applications, documentation, approvals and often middlemen again for a fresh loan. http://www.thefinancialexpressbd.info/search_index.php?page=detail_news&news_id=46681

BB relaxes forex transaction rules The Daily Star, Wednesday, September 24, 2008

The central bank has liberalised foreign exchange transaction rules to some extent for exporters, foreign investors and other foreign currency users. The Bangladesh Bank (BB) issued two separate circulars on Tuesday to this effect and allowed all banks to issue international credit, debit and pre-paid cards to foreign currency users. As per the liberalised rules, roaming mobile phone bill can be paid through the cards and in some cases currency can be remitted abroad without prior permission from the central bank. A BB senior official said the central bank has taken the steps to make the forex transaction rules more liberalised and timebefitting. Banks now can issue international credit card/debit cards against the balances held in the exporters' retention quota foreign currency (FC) account. The banks can also issue international cards in favour of up to three top-level executives of an exporting firm/organisation holding retention quota FC accounts. An exporting firm/organisation can avail of the card facility from a card issuing company only. The banks may issue international credit card/pre-paid card against the annual personal travel quota entitlement. International credit card/pre-paid card may be issued favouring officials of government/ autonomous/ semiautonomous institutions for official/ semi official visits abroad against forex entitlement fixed by the finance ministry. However, while issuing the cards the banks shall endorse an amount not exceeding the entitlement on the passport. http://www.thedailystar.net/story.php?nid=56240

SME refinancing trebles The Daily Star, Wednesday, September 24, 2008

Loans under the Bangladesh Bank's SME refinance scheme have increased more than threefold to about BDT 1bn (USD 14.6mn) in the April-June quarter from the previous quarter, according to the central bank officials. In the earlier quarter, an amount of BDT 282mn (USD 4mn) loan was disbursed. As part of the government initiatives, the central bank in 2004 introduced a refinance scheme (revolving) with BDT 1bn

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29 September 2008 (USD 14.6mn) to increase small and medium enterprises' access to bank finance at lower rates. Later, the fund was increased to BDT 3bn (USD 43.8mn) in fiscal year 2007-08 and BDT 5bn (USD 73mn) for FY 2008-09. Bangladesh Bank has SME refinance agreements with 16 banks and 22 non-bank financial institutes. These banks and non-bank financial institutions lend to the SMEs and receive refinancing from the BB on a quarterly basis. Among banks, Eastern Bank, Dhaka Bank, Mercantile Bank and One Bank disbursed the highest amount of SME loan last quarter. According to BB officials, Eastern Bank received the highest amount, BDT 215mn (USD 3.1mn), from the BB for financing the SME sector. Among the non-banks, IDLC, MIDAS and United Leasing were the leaders in SME credit financing. Meanwhile, a section of BB officials complained that some financial institutions charge the SME loans at their usual rates without considering the fact that the BB is refinancing the amount at a lower interest rate, which is contrary to the government and BB's desire that SMEs get easy access to bank finance at a relatively lower rate.

commitment made by the Bangladesh Association of Banks (BAB) to the central bank. On March 3 this year, the BAB confirmed to the central bank that its members would reduce interest rates on industrial term loans to 14.75 per cent from the existing 16 per cent while the interest rates for the productive sector will be brought down to 14.50 per cent from existing 15.50 per cent. The banks have slashed their interest rates by 0.75 to 1.75 percentage points for mainly term loans and working capital, the BAB added. The weighted average spread between lending and deposit rates in the country's banking sector came down to 5.34 percent in June from 5.75 per cent in March this year, according to the central bank statistics. Treasury officials of the commercial banks, however, expect the interest rates on deposits to go up further strengthening the credit deposit ratio position. Bankers and experts, however, said the real interest rate in the country is still low and, to some extent, negative because of high inflation rate that was 10.04 percent in June last. As a result, the banks are raising the interest rates on deposit to attract more funds from their clients.

http://www.thedailystar.net/story.php?nid=56242

Banks asked to submit reports on profit repatriation within 15 days of next month

http://www.thefinancialexpressbd.info/search_index.php?page=detail_news&news_id=46350

The Financial Express, Thursday, September 25, 2008

Climate Change

The central bank has asked the commercial banks to submit reports on profit repatriation by the foreign airlines, shipping lines and courier services within the 15th of next month. "We have taken the decision aiming to strengthen our monitoring on such foreign exchange transactions," a senior official of the Bangladesh Bank (BB) told the FE.

ATC Comment

He also said that Bangladesh Bank's latest move will facilitate the timely post factor examination of relevant documents and that would also help the service providing agencies to keep their documents updated. The central bank has already amended its guidelines for foreign exchange transactions (GFET) asking the authorised dealers banks, generally known as AD banks to follow the amendments while remitting such funds. http://www.thefinancialexpressbd.info/search_index.php?page=detail_news&news_id=46519

Seven banks raise interest interest rates on deposits deposits; four banks cut rates on lending The Financial Express, Tuesday, September 23, 2008

A number of commercial banks raised the interest rates on deposits; others reduced interest rates on lending in the current month aiming to narrow the interest rate spread. .At least seven commercial banks increased the interest rates on deposits in September to encourage the people to keep their money in the banks. The banks have raised the interest rates on deposit by 0.25 to 3.0 percentage points to attract fresh funds from general depositors, officials said on Monday. On the other hand, at least four out of 48 banks have reduced interest rates on lending this month in line with the

The level of public awareness to climate change is increasing, as evident from the increasing number of workshops held in the capital on the topic. Still, it can be said the interest is limited only to the elite members of the society not spread among mass. The government in its climate change strategy paper has emphasized on mass awareness and we believe the job to create a social consensus on the issue should be started with private sector as partners. Private promotional firms can be employed for the task. The Climate Change strategy and action plan prepared by the government should be revised and more workshops should be arranged so that the paper represents the voice of people from different social classes. And it has to be decided, what is total amount of fund required to face the challenges of climate change and a plan has to be formulated on how to raise such fund. An approach to raise fund could be to seek the assistance of established NRBs in the field. More workshops and discussion, we believe, will help to pin point the different aspects of climate change that require additional attention. Urge to face threat of climate change in comprehensive manner

The Daily Star, Friday September 26, 2008 While speaking at an event of “Climate Change”, Foreign Advisor Iftekhar Ahmed Chowdhury called for transfer of necessary resources to the more vulnerable groups of nations like the LDCs (least developed countries) in order to surmount the threat of climate change. He pointed out that the lion’s share of the cost for technology transfer to the poorer and more vulnerable countries has to be borne by the

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29 September 2008 developed world. Nearly 50 ministers representing both rich and poorer countries attended the event. Many speakers praised the domestic initiatives undertaken by Bangladesh in this area and also Bangladesh's contribution to stimulating the climate change debate, particularly with regard to “adaptation”. http://www.thedailystar.net/story.php?nid=56589

EU pledges continued help in climate change strategy The Daily Star, Saturday September 27, 2008

Ambassador and Head of Delegation of the EC to Bangladesh Dr Stefan Frowein assured that The European Commission (EC) will continue its support for the Bangladesh government's Climate Change Strategy and Action Plan through substantial contribution to various programmes. He admitted that a substantial fund is needed for mitigation and adaption strategy, while speaking as the chief guest at a workshop on Climate Change moderated by Dr KAS Murshid, research director of Bangladesh Institute of Development Studies. EC has launched Global Climate Change Alliance (GCCA) in September last year with an aim to providing a broader range of actions through dialogue and exchange as well as practical cooperation between the EC and the developing countries. Disaster expert Naim Gouhor Wahra, in a paper on Bangladesh's vulnerability to climate change, said climate change and its impacts should be taken into consideration while taking up any development work. According to him, Bangladesh is experiencing frequent floods due to climate change, and he added the recent floods are more devastating than previous ones. Naim suggested the inclusion of two more pillars -- creating public awareness and mobilisation of funds -- to the Climate Change Strategy and Action Plan. First Secretary of the EC Delegation to Bangladesh Koen Duchateau presented a paper on the EC's activities on climate change. http://www.thedailystar.net/story.php?nid=56082

Healthcare ATC Comment The government has proposed a revised National Health Policy (NHP) 2008. The first NHP, issued in 2000, is being implemented by the Ministry of Health and Family Welfare. A second revised NHP was issued in 2006. The latest NHP 2008 has been formulated to offer a policy framework which will be more relevant and timely in meeting the sector’s current needs. The latest NHP aptly recognizes some of the critical challenges the healthcare sector is facing today – acute shortage of medical professionals, potential health hazards due to global climate change, the need for medical waste management and the need for increasing efficiency of the public healthcare facilities. Some important proposals in the NHP 2008 are: - Increasing allocation of the national budget on healthcare from current 7% to 12% by 2015. - Allocating minimum 60% of the total government expenditure on healthcare for primary healthcare - Enabling greater participation of the private sector

AT CAPITAL RESEARCH - Taking initiatives to redress the shortage of medical professionals - Strengthening the government’s capacity for an efficient and effective regulatory role We believe that the government’s decision to gradually raise budgetary allocation on healthcare to improve healthcare standards at all levels and redress human resource shortage is commendable. The government’s decision to enhance participation of the private sector, especially in the secondary and tertiary level healthcare facilities, is also creditable given the government’s continued focus on primary healthcare. However, we believe that there should be a detailed and clear roadmap to implement these policies. The entry of more private players in the healthcare sector or privatization of inefficient public facilities might not be enough to ensure improved healthcare. The suggested policies need to be backed by definitive strategies that would offset malpractices like financial inter-linkages among the private and public sector providers, misappropriation of public funds and uncontrolled pricing of services by private providers. The government needs to formulate and enforce such a regulatory framework which would check such malpractices and establish healthcare rights of the general masses. Proposed health policy ignores basic issues The Daily Star, Tuesday 23 September, 2008

A group of healthcare experts disapproved the proposed National Health Policy 2008 which, they believe, ignores the provision of primary healthcare to the poor. They said this in a seminar on 'National Health Policy 2008: A critique and plan of action', organized by Health Movement which is a network of organizations working to protect health rights. Speakers at the seminar commented that the proposed health policy gives more priority to medical technology and ignores the basic need of preventing diseases and ensuring primary healthcare for all. They also criticized the decision to privatize different healthcare facilities. The speakers at the seminar announced that they would formulate the draft of a 'pro-people national health policy' in two months and place it before the next elected government. http://www.thedailystar.net/story.php?nid=56130

Grameen Health to establish independent collaborations with Pfizer, GE Healthcare, and Mayo Clinic Reuters, Wednesday 24 September, 2008

Grameen Health, an affiliate of Grameen Bank, announced today that it will establish independent partnerships with Pfizer Inc., GE Healthcare, and Mayo Clinic to create sustainable models for healthcare delivery in the developing world. Grameen Health has chosen to work independently with these partners because of their respective expertise: Pfizer Inc is the world's largest research-based pharmaceutical company, GE Healthcare is the world's largest manufacturer of medical devices such as ultrasound and CT/MRI, and Mayo Clinic is the world's first and largest integrated, not-for-profit group practice. Over the course of next year, the collaborations will focus on the following areas:

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29 September 2008 -- Implementing primary health promotion and disease prevention programs. These are the most cost-effective steps in affordable health care, and include maternal and child health promotion and nutrition programs. -- Analyzing ways to expand and improve the current lowcost micro-health delivery and insurance programs at Grameen Health's 38 existing Kalyan clinics. -- Developing continuous training programs for nurses, technicians and physicians. -- Reviewing operating efficiencies and scope of services (e.g., telemedicine, mobile health care) at Grameen Health's Kalyan clinics. -- Introducing genomic, epidemiological and outcomes research capability for the prevention and treatment of diseases relevant to the population in Bangladesh, with an emphasis on the best use of existing tested and approved procedures and drugs. http://www.reuters.com/article/pressRelease/idUS119163+24-Sep2008+BW20080924

Chief Adviso dvisor for accelerating health sector projects, program programs ograms

is getting only BDT 7 (10.2 Cents) for thousand cubic feet of gas production which is around 3% of what IOCs are charging! Contribution of IOCs in country’s gas production is increasing quickly due to various lucrative features and incentives offered to IOCs where local gas production companies cannot expand their operation due to fund crisis. Table: Current and proposed gas price Category Domestic (Double burner) Domestic (Single burner) Domestic (meter) Commercial Industrial Captive Power Plants Power Plant Fertiliser Industry

Current price (BDT)

Current price (USD)

Proposed Price (BDT)

Proposed Price (USD)

% Change

400.0

5.8

600.0

8.8

50.0

350.0

5.1

550.0

8.0

57.1

130.0

1.9

208.0

3.0

60.0

233.1 148.1

3.4 2.2

291.6 182.3

4.3 2.7

25.1 23.0

105.6

1.5

182.3

2.7

72.6

73.9

1.1

93.7

1.4

26.8

63.4

0.9

93.7

1.4

47.8

New Age, Thursday 25 September, 2008

The Chief Advisor, Dr. Fakhruddin Ahmed, emphasized accelerating different health projects and programs with further focus on maternal health in a conversation with the UNFPA Executive Director, Thoraiya Obaid, on the sidelines of the 63rd session of the UN General Assembly. The Chief Advisor also conveyed his satisfaction that the UNFPA was working in line with the government’s priority on ensuring and promoting safe motherhood, social and reproductive health information, family planning and services for adolescents and youth. He also appreciated the UNFPA campaign ‘End Fistula’ that has helped Bangladesh in the treatment of the disease in government hospitals. The UNFPA Executive Director said the UNFPA was thinking of setting up a centre of excellence in Bangladesh to help the country attain the MDGs. http://www.newagebd.com/2008/sep/25/front.html#11

Infrastructure & Energy

We agree that Bangladesh may not have adequate experience and expertise in gas exploration and thus needs to attract IOCs to explore its natural resources by offering different incentives and international price. On the other hand, Bangladesh needs to develop its own expertise gradually and should not be fully dependent on foreign companies on such a sensitive issue like mineral resources of its own. Unfortunately, most of the government owned energy companies are incurring ample amount of losses due to lack of right pricing and equal incentives that are offered to the private investor. This will ultimately create fund crisis of these government owned companies and they will continue to depend on government or donor agencies to expand their operations. To develop the capacity or expertise of the government owned energy sector, these companies first need to be profitable and should not depend on funding from donor agencies. From this point of view, Bangladesh needs to raise its gas prices mainly for the state owned gas production companies to help them expand their operations and to be self dependent.

ATC Comment Bangladesh Energy Regulatory Commission (BERC) on September 24 held its first public hearing on the proposed gas price hike of a maximum of 72.6% (for Captive Power Plants), and on an average of 45.3% across industries, amid strong opposition from businesspeople and consumers alike. At present, Bangladesh is producing gas around 1,800mmcfd where International Oil Companies (IOCs) are contributing around 50% of the total production. The state owned corporation buys gas at an average rate of BDT 230 (USD 3.36) per one thousand cubic feet from IOCs and sells the same to its consumers at BDT 92.84 (USD 1.36). On the other side, country’s largest state owned gas production company; Bangladesh Gas Field Company Limited (BGFCL)

Source: Petrobangla

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29 September 2008 Raising the gas prices across all consumer categories will increase the cost of doing business significantly. This could create a negative impact on the national economy by contributing to higher inflation and reduced to price competitiveness in the export industry. Considering these issue, we believe that gas prices should not be raised drastically in all consumer categories. The government can initially raise prices for domestic and commercial consumers as per the Petrobangla recommendation. For the other consumer categories like power, fertiliser and industry, the government must determine the net economic impact of such price increases prior to finalizing any gas price increases in these key sectors. In addition to implementing a reasonable gas policy, the government needs to focus urgently on developing our ample coal reserve to reduce our dependency on our quickly depleting gas reserves. Energy division division seeks nod for Production Sharing Contracts ontracts with two International Oil Companies New Age, Saturday September 27, 2008

The Energy Division has sent the proposal to the chief adviser for approval of the selection of two international oil companies (IOC) to sign production sharing contracts (PSC) for nine offshore blocks. Petrobangla, the state-run oil, gas and mineral resources corporation, has selected US-based ConocoPhillips for eight deep-sea blocks and Irish Tullow Oil for a shallow sea-block for hydrocarbon exploration and production through the offshore round of bidding. The PSCs with the companies is likely to be signed in OctoberNovember this year once the chief adviser approves the selection. Petrobangla invited bids in February 2008 for exploration of 28 offshore blocks for gas and oil, and opened the tenders on May 7. Seven international companies submitted offers for 15 of the blocks and the tender evaluation committee selected ConocoPhillips for eight blocks and Tullow for one block. Exploration of gas in country’s deep sea is urgent as the country is going to to face massive gas shortage after 2011 with the current reserve. http://www.newagebd.com/2008/sep/27/front.html#9

Petrobangla's gas price hike proposal opposed The Financial Express, Thursday September 25, 2008

The energy sector stakeholders including trade bodies, consumers' associations and members of the civil society in a public hearing on September 24 opposed Petrobangla's proposal of raising the gas price by 45.3% on an average for all categories of consumers. They opined that the drastic hike in gas prices would hamper the country's investment and industrial growth leaving an adverse impact on the national economy. The decision over Petrobangla's proposed gas price hike will be taken by October next in the form of an order. The stateowned parent gas company incurs losses as it purchases gas at higher prices from the international oil companies (IOCs) and sells it at lower rates. This is for the first time in Bangladesh's history that a separate entity other than the ministry is deciding on a hike in gas tariffs.

BPC to import gas oil blend to reduce import cost of diesel New Age, Thursday September 25, 2008

The state-owned Bangladesh Petroleum Corporation (BPC) has taken a move for the first time to import 100,000 tonnes of low-cost gas oil blend to minimise the cost of diesel import. The procurement proposal has already been sent to the advisory council committee on purchase through the ministry concerned. Gas oil blend has low percentage of sulphur and cetane while the Kuwait Petroleum Corporation (KPC) supplied diesel contains higher percentage of sulphur and cetane. If these two items can be blended properly, the expenditure against diesel import will come down. A Singapore-based firm has agreed to supply the gas oil blend with the premium of USD 4.65 per barrel where BPC procures diesel from KPC with the premium of USD 6 per barrel. KPC is the major supplier of diesel and other petroleum products to BPC that annually imports 3.8 mn tonnes of fuel. The BPC is looking for alternative fuel sources to reduce its dependence on KPC, which demands a higher premium as a result of such dependence. http://www.newagebd.com/2008/sep/25/front.html#18

BPDB to pay higher price for Barapukuria coal The Financial Express, Tuesday September 23, 2008

The government has raised the price of Barapukuria coal for Bangladesh Power Development Board (BPDB) by nearly 20% at USD 71.50 a tonne from the previous USD 60. Chief adviser's special assistant professor M Tamim said, "The coal price has been increased in line with the recommendations of the Executive Committee for National Economic Council (ECNEC). "The international price of similar quality coal now ranges between USD 190 to 195 per tonne," the BCMCL managing director said. The coal mining company would have to count loss as the production cost of the BCMCL coal stood at USD 84 per tonne as per the latest audit report for 2006-07. The BPDB consumes 80% of the BCMCL high quality bituminous coal where the remaining 20% are consumed by the private sector. The new price would not affect the pricing for the private consumers and they would have to purchase the BCMCL coal at a price to be determined through open tenders. http://www.thefinancialexpressbd.info/search_index.php?page=detail_news&news_id=46338

ATC Comment Government of Bangladesh has been weighing different options to raise USD 650mn from different sources for the USD 1.8bn Padma Multipurpose Bridge. The World Bank, Islamic Development Bank, Japan Bank for International Cooperation, and Asian Development Bank are financing USD 1.15bn for the bridge, while the balance of USD 650mn has to be financed by the local government.

http://www.thefinancialexpressbd.info/search_index.php?page=detail_news&news_id=46521

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29 September 2008

http://thedailystar.net/story.php?nid=56672

Sources WB ADB JBIC IDB Rest Amount Total

Amount (in USD mn) 300 350 200 300 650 1800

Different Options to raise USD 650mn:
Converting Padma Bridge into a company and raising the money from the stock market
Imposing levy and surcharge
Financing from Annual Development Program.

ATC Comment It has been more than three years since the prospect of a second highway connecting Dhaka with Chittagong came into existence. The Malaysia consortium, Azimat Consortium first proposed to build the expressway in a BOOT (BuildOwn-Operate-Transfer) basis with a concession of 35 years, 5 years for construction and 30 years for getting the return on investment. In July 2006, the government approved the project. Since then, more than 2 years have passed, but the government has not even yet prequalified the interested firms. This procrastination and lengthy waiting period in starting infrastructure projects will work as a deterrent for the overseas investors and operators. Second DhakaDhaka-Chittagong highway highway in limbo: Fresh preprequalification bid awaits government nod The Daily Star, September 24, 2008

Kuwait has now come forward with a plan to finance the construction of the bridge. Though it’s still in a very preliminary phase to know how much they will finance or on what terms, it is good news for the Bangladesh government. This will remove the financial constraints to a great extent and expedite the construction of the bridge. The proposed 5.58 kilometer long and 25 meter wide fourlane Padma Bridge, which will be built at Mawa-Janjira site over the mighty river Padma, will push the country's GDP by 1.2 per cent, according to Japanese experts belonging to the Japan International Cooperation Agency (JICA). Economic Internal Rate of Return has been estimated 15.13 percent. After opening the bridge in 2015, the traffic volume at Padma Bridge will reach 21,300 vehicles per day and 41,600 vehicles per day in 2025. It will induce 743,000 man per year employment opportunities. The southwest region of the country would receive the biggest benefits from the bridge, the experts said. The construction of Padma Bridge with railway provision is most likely to bring about a revolution in the transportation network of the country's southwestern part. It is also expected to bring immense economic and social benefits to the people in the region. With the bridge connecting the southwest to the central and other parts, investment and capital inflow will boost industrial and commercial activities and create increased economic and employment opportunities. Kuwait to give aid to build Padma Bridge

The Daily Star, September 27, 2008 Kuwait has assured Bangladesh of providing necessary financial support for construction of Padma Bridge. Kuwaiti Prime Minister Sheikh Nas'r Muhammad Al-Sabah gave the assurance during a bilateral meeting with Chief Adviser (CA) Fakhruddin Ahmed on the sidelines of the 63rd session of UN General Assembly at UN headquarters on Thursday. After the meeting, Chief Adviser's Press Secretary Syed Fahim Munaim told newsmen that the Kuwaiti premier told the chief adviser that his country would provide financial assistance for construction of Padma Bridge from the Kuwait Fund. He requested the CA to send details of the bridge project for processing the financial assistance.

The second Dhaka-Chittagong highway project is gathering dust for over a year after the Roads and Highways Department (RHD) failed to find a suitable firm for the construction in July last year.. The RHD is, however, preparing so that it can invite firms for the pre-qualification round soon after it gets permission to do so from higher government officials. Although initiated in 2005 and approved by the cabinet in July 2006, there is hardly any headway in the project except issuing of an invitation for pre-qualification round in July last year. The project has stopped midway and remains stalled since then as four pre-qualified firms failed to fulfill all the "tough" criteria set by the government. Criteria for prequalification would be relaxed in the fresh invitation. The four-lane dual carriageway spanning 215 kilometers from Dhaka to Chittagong will be constructed on a build, own, operate and transfer (BOOT) basis. This would be the first expressway in the country with facilities like adequate parking space, fuelling stations, food courts and rest houses at regular intervals. This expressway, once built, would cut the journey time between the two major cities to three hours from existing seven to eight hours. It would also help develop the economic corridor between the capital and the port city. A three-route option has been kept open from which one would be selected for the highway. The first runs parallel to the existing highway, while the second route starts from Jatrabari towards Narayanganj and then moving to the south to cross the Dhaleswari river, Munsiganj, the Meghna and finally reaches Chittagong through Chandpur and Noakhali. The third probable route begins from Jatrabari to reach Chittagong by crossing Laksham and Feni and will be the shortest and most direct one. The then cabinet of BNP-led coalition government approved construction of the second highway with private investment on July 4, 2006 on the basis of a proposal made by Malaysiabased construction firm Azimat Consortium. In its proposal, the firm said it would take five years to complete the construction. After operating for 30 years and recovering the investment through collecting toll, the expressway will be handed over to the government, it proposed. The communications ministry forwarded the proposal to the high-

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29 September 2008 powered private infrastructure committee (PICOM). The proposal was then placed before the cabinet for final approval. Now the Malaysian firm will be considered prequalified due to its proposal but it has to take part in the competition with other firms. http://thedailystar.net/story.php?nid=56271

Telecoms Three firms firms clinch licences to operate WiMax The Daily Star, Thursday September 25, 2008

Three bidders yesterday each won a WiMAX licence. The winners competed against six other bidders and won by agreeing to pay BDT 2.2bn (USD 31.4mn) each in acquisition fees. The three bidders -- BanglaLion Communication, BRAC BD Mail Network Ltd and Augere Wireless Broadband Bangladesh Ltd -- won the licences at an auction organised by Bangladesh Telecommunication Regulatory Commission (BTRC). The BTRC yesterday also distributed 35 MHz spectrums to each winner. On a priority basis, BanglaLion chose 25852620 MHz bandwidth, while BRAC BDMail and Augere Wireless went for 2330-2365MHz and 2365-2400MHz respectively. As per the WiMax guidelines, these three companies will have to start operations by March 2009. As per the WiMAX guidelines, bid winners can form joint ventures with foreign firms, but their share should not exceed 60 percent However, non-resident Bangladeshis are allowed to invest at 70 percent ownership in such joint venture with a local partner. The licensees will develop and operate a broadband network to provide nationwide service. At least 128 kbps download rate with upload download ratio of 1:4 per subscriber should be ensured at all times. The operators should have the capability to provide domestic roaming service within their own networks. They must provide interoperator roaming service when such technology is available and directed by BTRC. The licensees will have to go for initial public offering (IPO) within three years of licence issuance, and shall not be allowed to transfer any shares before issuance of the IPO. http://www.thedailystar.net/story.php?nid=56368

Grameenphone teams up with post office The Daily Star, Thursday September 25, 2008

Grameenphone yesterday sealed a deal with the postal department to boost its revenue by going deeper in rural areas through the postmen working in about 8,300 postal branches. Under the agreement, the largest cell phone operator will provide 24,000 SIM cards, having the benefit of Flexiload and public phone, for the postmen enabling them offer recharge, local and overseas calling services to the people in remote areas. The new service will come into effect from November. http://www.thedailystar.net/story.php?nid=56370

BTCL earning drops 35% The Daily Star, Thursday September 18, 2008

BTCL, the state owned landline operator, announced that its earnings dropped by 35% to BDT 350mn (USD 5.11mn) in the second month of operations as a public limited company. The main reason behind this decline was the lowering of call tariffs. The company in July introduced the lowest tariff in the market. The BTCL offers Tk0.10 per minute in off peak and Tk0.15 per minute in peak hours, whereas minimum tariff offered by private landline operators is Tk0.25. The landline sector as a whole has been experiencing glacial growth compared to the mobile phone industry. While the mobile phone sector has grown at a CAGR of 99% between 2003 and 2007, the landline sector has hardly seen double digit growth. Apart from BTCL, all other landline operators are in the red, with substantial capital investments, intense competition within, and a lack of demand for landline phones crippling the sector. http://www.thedailystar.net/story.php?nid=55354

Textiles ATC comment A shortage of skilled workers in the country is a detriment towards the production of higher-end RMG products. At present, the largest employment-generating sector cannot optimize productivity due to unskilled manpower. Accordingly, if Bangladesh is to consistently pose a competitive challenge to countries such as China, Vietnam, Cambodia and Mexico, a sufficient number of country-wide training programs need to be implemented in the immediate future. During this week, the recent initiative taken by BGMEA and Bangladesh Manpower, Employment and Training (BMET) is exactly following this challenge. They signed a memorandum of understanding (MoU) to train 15,000 unskilled workers through 23 training centers. The Bangladeshi RMG industry is worth $10.7 billion and employs about 2.5 million people directly, with another 12 million whose livelihoods are indirectly dependent on the sector. We at ATC believe that the RMG sector can achieve its target of USD 25b exports by 2013 (as stated by BGMEA during this week) through synergizing the public-private initiative to improve the country's image, building up human resources through training initiatives and working together with the government to improve infrastructure like gas, electricity, highways and economic zones. The country's home textile exports grew nearly 14% in the fiscal year ending June 2008 and over 150 exporters earned nearly USD 300m from shipments to the European Union and the United States. A number of countries of North and South America, Europe, Africa, Middle and Southeast Asia are major markets of Bangladesh's home textiles. Unlike other sub-sectors of the RMG industry of Bangladesh, home textile producers have good backward linkages as the manufacturers get more than 70 per cent raw materials from local sources. Coupled with low labour cost, it makes our products more competitive.

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29 September 2008 Home textile manufacturers of China and some other countries have shifted their focus to high valued textile items, as their production cost has increased due to soaring wages and inadequate backward linkages. This diversification strategy will assist in the growth of the Bangladesh home textile industry, which will grow by up by 30 percent to USD 1b this year. This also poses an opportunity for Bangladesh to tap into a higher end textile market. According to our analysis, one of the major obstacles to home textile export growth is the lack of diversification in products and markets, especially our lack of presence in the giant market of neighboring India. A small range of products (shirts, trousers, T-shirts, sweaters, jackets) makes up 60 percent of RMG export. Vigorous marketing and promotional drives would be needed to break into markets for other RMG products that Bangladeshi producers can produce competitively. Since R&D and market research to expand the product mix and public support in this area will be critical, a comprehensive research center built on public-private partnership should be established. Its role would be to gather and disseminate information effectively to local manufacturers on the latest developments in products and markets, including information on fabric developments, blends, colors, patterns, latest fashion trends and design forecasting, as well as providing customer service to foreign buyers purchasing from Bangladesh. Another problem is that most firms have very little or no effective marketing strategies. We believe that firms will enhance their productivity once they implement effective marketing strategies.

AT CAPITAL RESEARCH 95pc RMG units pay timely: BGMEA The Financial Express, Thursday, September 25, 2008

BGMEA claimed that the vast majority of RMG units timely pay their workers better than minimum wage. The BGMEA also added that 95 per cent of the workers are peace-loving and hardworking people and are not the ones rioting on the streets. Touching on employee welfare initiatives by the BGMEA, BGMEA stated that it runs 10 medical centres and schools for workers and their families, and also provides scholarships to 2,000 meritorious children of employees each year. The BGMEA also expressed its need for support from the next elected government to maintain political stability and ensure the right economic policies http://www.thefinancialexpressbd.info/search_index.php?page=detail_news&news_id=46527

DutyDuty-free RMG exports to India hit snags The Daily Star, Friday, September 26, 2008

Bangladesh signed an agreement with India in September last year to export eight million pieces duty-free garment items a year to narrow the trade gap between the two countries. In line with the agreement, New Delhi asked Dhaka to send the garment products by December 31 to reach the target. Under the total quota, affiliated members of the BGMEA will get a 70 percent share, while BKMEA members will get the rest of the pie. However, Bangladesh may miss out on the duty-free quota mainly because of tepid response from local exporters. BGMEA had relaxed rules to encourage the exporters to take advantage of the quota and meet the deadline. The garment trade body had also

BMET to train 15,000 unskilled RMG workers The Daily Star, Monday, September 22, 2008

BGMEA signed a 2-year memorandum of understanding (MoU) with Bangladesh Manpower, Employment and Training (BMET) Bureau to train unskilled people for the garment sector. Under the agreement, the BGMEA will use 23 training centers of the employment bureau to train around 15, 000 unskilled workers. http://www.thedailystar.net/story.php?nid=55906

BGMEA eyes USD 25b exports by 2013: Links enhancement of the volume to political political stability The Daily Star, Thursday, September 25, 2008

BGMEA promised to shoot up the country's exports to USD 25b by 2013 provided the coming elected government and all concerned could maintain political stability and ensure right economic policies. BGMEA also expressed gratitude to the caretaker government for its role in ensuring 525 days free of hartals. Moreover, they also seek support from the government as well as the policy makers to obtain the target. http://www.thedailystar.net/story.php?nid=56390

published advertisements in national dailies asking the exporters not to blow the export opportunity. After the finalization of the agreement with India, BGMEA was instructed to issue certificates only on the basis of letters of credit, but it has also issued certificates in line with contracts signed between two parties. BGMEA and BKMEA have so far issued certificates to the exporters on 2.5 million pieces out of eight million. Some exporters have complained of hassles, as some banks take so long in transactions. Export Promotion Bureau (EPB) also added that the quota fulfillment had depended on the RMG exporters. http://www.thedailystar.net/story.php?nid=56502

Home textile exports may fetch USD 1bn 1bn in next few years The Financial Express, Friday, September 26, 2008

Export of home textile products can fetch USD 1b by the next few years as exports of home textile items such as bed linen, cushion, blanket, nakshikatha, curtain and pillow will continue to boom in the next years because of recent spike in labour cost has forced dozens of manufacturers of China and some other countries of the region to shift from their traditional products. Industry insiders said home textile products have the potential to earn USD 1b from export by 2012-13 fiscal years. They are expecting over 30 per cent growth in export in the current fiscal year as our prime competitors are diverting to other high-end products gradually. The demand for home textile to the USA and Europe, which account for Bangladesh's 80 per cent export market, rose sharply in the recent months amid declining shipments from some south and Southeast Asian countries

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29 September 2008 including China, Pakistan and India. Moreover, new buyers from many European countries such as Italy, Britain and France have also shown interest on Bangladeshi home textile because of its superior quality and exquisite fashionable designs. http://www.thefinancialexpressbd.info/search_index.php?page=detail_news&news_id=46567

AT CAPITAL RESEARCH an exclusive tourist zone similar to an export processing zone will be set up. Mehdi said proper arrangements for entertaining the tourists will be ensured in line with local traditional and cultural values. The sources said Bangladesh Parjatan Department will work as the regulatory body. http://thedailystar.net/story.php?nid=56392

Tourism Seagull Seagull plans luxury hotel in Teknaf The Daily Star, Sunday September 28, 2008

Seagull Hotels Limited, the owning company of Seagull Hotel, a luxury property in Cox's Bazar, is going to set up similar property in Teknaf, a southern coastal area that is approximately 500 kilometres away from Dhaka. The company has already initiated the process of purchasing land in Teknaf to set up the hotel, which is scheduled to be completed within the next three years at a cost of around BDT 6bn (USD 88mn), according to Managing Director of Seagull Hotels, Masoom Iqbal. He also mentioned that the number of both foreign and local visitors that frequently visit the area has increased rapidly in recent years. The proposed hotel is to have a golf course, theme park, ropeway, marine aquarium and marine drive facilities. Masoom further urged the government to formulate a policy that will ensure the places within the coastal districts are effectively utilized as tourist spots. He also called upon the government for making available an air landing space, bus and good railway communication facilities near Teknaf so that tourists can go there easily at cheaper costs. He also added that there is the potential of generating business worth USD 5-10bn from tourism every year from Cox's Bazar, Teknaf, Sonadia and St Martin's coral island. http://www.thedailystar.net/story.php?nid=56825

Parjatan's bifurcation on cards The Daily Star, Thursday September 25, 2008

Bangladesh Parjatan Corporation is to be bifurcated in order to encourage the tourism industry and to attract more local and foreign investors, according to official sources. The Council of Advisors is likely to approve a tourism-friendly policy next month that will open up a new horizon for the industry. The initial plan is to split the corporation into the Bangladesh Tourism Board and Bangladesh Tourism Department. A draft of Bangladesh Parjatan Ordinance 2008 has already been sent to the Civil Aviation and Tourism Ministry for approval. Special Assistant to the Chief Advisor for Civil Aviation and Tourism Mahbub Jamil said the government has been working to move the industry ahead on the basis of a publicprivate partnership. According to the proposed ordinance, Parjatan's Chairman Shafique Alam Mehdi said the National Tourism Board will be an autonomous body. It will have the power to take decisions and implement them. To ensure private sector participation, five out of ten directors will come from the private sector. He also mentioned that under the new policy,

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© Copyright 2008. Asian Tigers Capital Partners Limited, Level 16, UTC Tower, Panthapath, Dhaka – 1215, Dhaka, Bangladesh. All rights reserved. When quoting please cite “AT Capital Research”. The above information does not constitute the provision of investment, legal or tax advice. Any views expressed reflect the current views of the author, which do not necessarily correspond to the opinions of Asian Tigers Capital Partners or its affiliates. Opinions expressed may change without notice. Opinions expressed may differ from views set out in other documents, including research, published by Asian Tigers Capital Partners Limited. The above information is provided for informational purposes only and without any obligation, whether contractual or otherwise. No warranty or representation is made as to the correctness, completeness and accuracy of the information given or the assessments made.

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