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Goldman Sachs expects that, within the next 50 years, 5 of the G-7 nations will be replaced by emerging economies. Many of these economies have large population, cheap labor and high levels of productivity. The Bangladeshi economy possesses these characteristics, leading Goldman Sachs to include the country in its list of “The Next Eleven (or N-11)” - economies that are expected to have a high potential for driving the global growth in the 21st century. Similarly, Citi Group has also included Bangladesh in its list of 3G (Global Growth Generator) countries. Given the immense potentials of Bangladesh, there has been a lot of interest on this small economy, as a new destination for foreign investments (both direct and portfolio). On the backdrop of the Middle East crisis, which made many emerging market funds somewhat reluctant about investing there, this interest is likely to increase further very soon. One question that arises for foreign investors is how correlated Bangladesh is with the global economy. This report, aims to find to what extent such correlations exist (in terms of the economy and capital markets), where the major exposure of the country are, and whether foreign investments would benefit from diversification.
Bangladesh has maintained a more or less stable growth rate. though in some cases higher than Bangladesh. has fluctuated quite a bit. the US economy experienced a recession in the early 1990s (July 1990 – . GDP growth of Pakistan and Vietnam. We find that over a period of 10 years (2001 to 2010). Figure 2 shows a five year moving correlation of the growth rate of the world economy and Bangladesh over a period of 26 years (1984 to 2010). and Vietnam and Pakistan (which are taken as proxy for other N-11 countries). or in some cases becomes negative in times when the US economy goes through a recession. What is interesting is that the correlation decreases. We start tracking data after the 1980s to remove the effect of any structural changes that may have been brought on by the country’s independence in 1971.The Macro Economy Stable growth. the USA (a proxy for the developed economies). Figure 1 compares the GDP growth rate of Bangladesh with the world. Moreover. very little correlation with the global economy: Bangladesh has experienced very stable economic growth over the last decade. The figure shows that the moving correlation varied from strongly positive to negative over the period concerned. much higher than those of advanced economies. For instance.
96 to 0. Finally.37. due to the oil price shock and S&L crisis. during the early 2000s the US economy went into another recession following the “Dotcom crash” and the 9/11 attack. we see the moving correlation for Bangladesh to be declining. as linkages increase. . One important issue that must be noted however is that over time. During this session again. we find a very strong negative correlation between the global economy and Bangladesh. At that time. the moving correlation dipped down from 0. there has been a more or less upward trend in the moving correlations. signifying that the Bangladeshi economy is becoming more and more linked with movements of the global economy. we see that during the most recent financial crisis of 2008.March 1991). Similarly.
respectively. with rates reaching to about 10% in Bangladesh.3% in Vietnam and Pakistan. even though the rate for Bangladesh has not fluctuated as much as that of Vietnam and Pakistan. but dictated by global food prices: We compare the inflation rate of Bangladesh with that of the United States and the two comparable economies – Vietnam and Pakistan (Figure 3). . signifying that the country still has large exposure to global economy in this regard. We see that on average food inflation in Bangladesh follows the trend in global food prices quite closely. prior to the global financial crisis. Our earlier report on “Inflation in Bangladesh: Driven by global phenomena” found that much of the food price increase can be attributed to global food price hikes.Inflation under control. Figure 4 shows food inflation trends in Bangladesh along with the World Food Index (WFI) of the Food and Agriculture Organization (FAO).1% and 20. Inflation rate peaked in 2008. while it soared to 23. given the large weight of food in CPI calculations. We see that all four economies follow similar trends in inflation. On average. inflation rates in these two economies have also been higher than that of Bangladesh Inflation in Bangladesh is mostly driven by food prices.
We compare the S&P 500 index (to see stock market performance of the United States) and MSCI World Index (as a proxy for global stock performance) with our own BRAC EPL Index (BEPL) over the mentioned time period. even if the eventual correction in December was also quite enormous. It can be understood from the figure that the Bangladeshi stock market has given returns substantially greater than the S&P 500 and the world as a whole. Hence. S&P 500 and MXEF) faced severe corrections during the financial crisis. We also compare BEPL with the MSCI Emerging Market Index (MXEF). Returns from emerging markets were also high in spite of the correction in 2008 due to the global financial crisis. MSC World Index and MXEF are different from that of BEPL (which is shown on the right-hand axis). no effects were be observed in the Bangladeshi market. It should be noted that while all three indices (MSCI World.diversification benefits possible: We use data for a little more than 10 years (January 2001 to March 2011) to show how correlated the Bangladeshi capital market is with the rest of the world. Figure 9 shows how returns from the S&P 500. the DGEN returns are likely to be more suppressed than actual returns experienced. low correlation with global markets . Please note that the axes for S&P 500. The reason for using BEPL rather than our benchmark index DSE General Index (DGEN) is that we believe that there are discrepancies in the calculation methodology of DGEN. The figure shows values of the said indices in rebased form for comparisons. MSCI World Index and MXEF compare with returns from BEPL. .Capital Markets High returns.
figure 11 shows the 5 year moving correlation for monthly returns of BEPL and MXEF. We find that overall. The correlation trend here is strikingly similar to that of figure 10. Finally.In order to provide a more in-depth analysis of market movements. Figure 10 shows moving correlation of BEPL returns with the S&P 500 and MSCI World returns. even if in recent times (following the 2008 crisis) the correlation has largely been negative. the correlation reverts to zero (for both indices). we calculate a 5 year moving correlation of BEPL monthly returns with that of the other three mentioned indices. .
S&P 500 and MSCI Emerging Markets Index: We believe that Bangladesh offers unique opportunity to global investors in terms of return enhancement and risk mitigation. . At the same time. semi-segmented Bangladesh economy and capital market will lower the volatility of globally invested portfolios. With robust growth outlook and younger listed corporations.In conclusion. equity returns are very promising. we provide the following table to show how returns from the Bangladeshi capital market compares with the MSCI World Index.
Bangladesh has a domestic supply of good quality raw material. 2. The industry lacks domestic technology and expertise and local support industries such as chemicals are still under-developed. Sub-segments of this industry are 1. Finished Leather Leather Goods Sector Highlights: 1. 3. as hides and skins are a by-product of large livestock industry. Adequate government support in the form of tax holidays. .Bangladesh’s Leather Industry Leather industry is an old manufacturing sub-sector in Bangladesh with a long heritage of over five decades. duty free imports of raw materials and machinery for export-oriented leather market 4. 2. This is an agro based bi-product industry integrated with locally available indigenous raw materials (hides and skins) having tremendous potentials for export development and sustained growth along a considerably long duration of time length. The labor-intensive leather industry is well suited to Bangladesh having cheap and abundant labor.
and footwear. 2. With the exception of a few tanneries located in Chittagong and other places of the country. Present Government is in the process of setting up of separate Leather Zone relocating the existing industry sites to an well-organized place. The industry is entirely in the private sector which has proved to be fully capable of handling it. Issues related to concerns for the environment generated by the tanneries and health and hygiene factors for both the tannery workers and the people living nearby continue to haunt the image and operational efficiency of the sector. 186 are located haphazardly in . Industry Profile The leather industry in Bangladesh is well established and is an important foreign exchange earner. More than 80% of leather and leather products of Bangladesh are marketed abroad. finished leather. The country's share in the world leather market is still very insignificant with a share of 0. Out of the total 207 tanneries of Bangladesh. This promising sector is suffering from a host of problems including problems related to management and infusion of advanced technology and innovative and integrative marketing strategy.36% of world leather trade in 2004. mostly in the form of crushed leather. An important characteristic of the leather industry in Bangladesh is its rather poor domestic demand. New FDI inflow is highly encouraged and foreign investors are welcome to have the opportunity. tanneries located mostly in the Hazaribagh area of Dhaka city. leather garments. The industry is generally export based. More than 200 modern tannery units are now in operation in the industry.Investment Incentive: 1. Leather industry is a vital component of Bangladesh economy in terms of foreign exchange earnings since it is the third highest foreign exchange earner after RMG and frozen food.
32. hand bags. China and the USA. The unplanned tanneries at Hazaribagh do not have supporting infrastructure facilities. case holders etc. suitcases. travel goods. According to Bangladesh Export Promotion Bureau (EPB). belts. contribution of leather sector to total GDP was 0. Though there has been some appreciable improvement in animal husbandry and butcher's techniques in Bangladesh in recent times. is in the process of shifting to Savar in consideration of the pollution it cast upon the Dhaka City and because of an acute lack of space for expansion and modernization.219% buffalo hides. the leather sector accounts for 3-4 per cent of total export earnings. Over 50 manufacturers are producing various leather items such as footwear. The annual domestic supply of hides and skins is around 200 million square feet. The principal raw materials for this industry are cowhides and goat skin. however. wallets. At present. Singapore. Brazil. The larger tanneries are basically public or private limited companies.32% in 2005. Germany. fashion accessories. The major importing countries are: Italy. for overseas export. The industry. Many of them are established as proprietorship or partnership. briefcases.09% Sheep skin and 2. No tannery in the area has effluent treatment facilities. The Black Bengal and other variants of goat skin from Bangladesh enjoy an excellent reputation for quality worldwide. Most of the small tanneries are family owned and operated as cottage type industries. and finished leather (20%).74% goat skin. Footwear and leather goods (5%).98% Cowhides. it may take quite some time to reach the international standard. consisting of 63. Only a few tanneries have proper accounting practices and financial controls in place to define their profitability and financial condition. 1. posing a grave threat to environment. At present leather and leather products are exported to about 53 countries of the world. Local Consumption of leather is around one fifth of the total output and the rest 80% is exported in the form of Crust leather (75%). EPB .Hazaribagh area in Dhaka where 84 per cent of the total supply of hides and skins are processed in a highly congested area of only 70 acres of land.
rise of international terrorism.000 workers are associated with retailing of leather. BBS. Currently it is estimated that about 150. low value addition. out of which.33 per cent of the total foreign direct investment into the country. 200. incorrect planning and improper implementation.12 million.32%). During this period (from 1998 to 2005).000 people are involved in raw hide collection and supply and 50. 30.000 people are employed directly or indirectly in leather and its subsectors. the total foreign investment in the industrial leather sector was $136. Foreign investment to the industrial leather sector of Bangladesh has been very limited. inadequate financing. the net results of development efforts undertaken for the leather export sector of Bangladesh have been far from impressive due to the poor quality of processing. LSBPC. GTZ. Figure-2 exhibits that the export growth rate of Bangladesh leather sector declined initially in the year 1998-1999 because there was economic recession in Bangladesh due to massive flood. About 300. .78 million in 2004-2005.sources report that export earning from leather goods was US$ 287.22%. This sector is also a major employer of semi-skilled workers. ILO.000 are working in tanning industry.000 persons are employed in the footwear industry.000 persons are in leather goods industry and another 8000 persons are involved in exporting of leather and by product processing. illegal export to India. about 80% are from leather and the rest is from finished leather goods. which is a vital step towards alleviating unemployment. RSMA and ITC-ATF) Despite having a great potential for growth. Information obtained from a number of credible sources exhibits that in total (accumulated) 741. the Twin Tower (9/11) incident. Till March 2003. lack of marketing skill. In the year 2002-2003 export growth rate was negative because of the global economic recession as a consequence of the War in Iraq. the growth rate was highest in 2000-2001 (16. (Source: BCLT. fundamentalist orientations. etc. Export growth rate for the year 2004-2005 was 8. poor technological base. which is only 1.
Presently.located at the new site with modern waste-treatment plants to create a healthy environment.Industry Life Cycle: Growth Potential The leather industry with over Taka 160 billion annual export earnings is the country’s third biggest foreign exchange earner after the RMG and the frozen food sectors. For Bangladesh. Leather industry is growing all over the world – both in market potentials and in installed capacity.2002 and it is expected to reach US$ 235 million in 2005-2006 as the demand for quality raw material for finished leather goods is increasing in developed countries. A thorough analysis of the historic data shows that factors like demographic composition. About 200 leather units would be re. Local and foreign experts believe that this sector could replicate the successes of the Readymade Garment (RMG) sector if the government and genuine entrepreneurs join hands for effective cooperation and develop the sector with a comprehensive strategic plan. Bangladesh Government has reiterated its decision to treat the industry as one of the thrust sectors and reduce interest rates for industrial credit to this sector to seven percent (7%). export earning only from leather was US$ 207 million in 2001. The size of the global footwear market is enormous as well. and (ii) the existence of export processing zones and facilities including incentives like tax holidays for 10 years. where most of the tanneries are concentrated. many of the advanced communities consider Bangladesh as a worthwhile investment destination due primarily to: (i) an abundance of a marked low-wage labour force. it has a good growth potential if entrepreneurs can avail modern technology to diversify their products and designs according to international market trends and apply modern tools for marketing & promotion. Though till now Bangladesh has shown poor performance in the leather goods sector. of pollution. The government has decided to develop a leather industrial area at Savar. Realizing this sector’s growth potential. depth and reach of urbanization and distribution of wealth have consistently shaped the growth of the footwear industry. A report of Japan-Bangladesh Business Associations including Japanese Commerce and Industry Association (SHOO-KOO-KAI) shows in clear terms that remarkable economic development and concentration of massive FDI within a . outside Dhaka where tanneries from Dhaka would be shifted to free the Hazaribagh area and the river Buriganga in general.
short period of time in China. the demand for footwear would be 20 million pairs per year. increasing labour costs in Thailand. there is a large latent domestic market for quality footwear and other leather goods in Bangladesh as well. SWOT Analysis . particularly in area like leather. Also about 10% of the total population of Bangladesh (14 million) is recognized to have an income level comparable to that of their rich country counterparts. Hence. and inadequate domestic market for high-income groups in Vietnam. is leading Japan to think of investing more in Bangladesh. Assuming that two pairs of footwear are purchased by a person in this group.
What is essential now is to prepare and adopt strategic plan. set organizational structures in government and industry to implement their plan and evaluate the achievements in the light of emerging markets and technological factors and revise the strategic plan accordingly for the next five to ten years. Bangladesh should forecast to attain a 5-7% growth in export earnings from leather sector and combine necessary acts together for that purpose .The SWOT Analysis presented above along with the existing & projection of demand trend of Bangladesh leather sector (section 3.4) and the growth potential of Bangladesh’s leather sector (section 3. The EPB made forecast of export growth targets of less than 4% per year is too pessimistic for this sector.6) give us a strong signal that the leather sector in Bangladesh has all the basic elements for a sustainable rate of growth in the future.
86 12.27 40.00 25.22 19.72 12.00 16.00 2008 168.11 20.82 25.18 510.00 2007 225.00 2011 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a .96 215.49 32.00 2002 10.13 30.56 430.05 26.00.96 19.72 10.24 12.39 392.47 14.92 5.75 14.03 653.47 42.00 16.33 8.88 25.48 176.52 142.99 22.78 334.41 10.83 218.53 10.87 14.44 149.48 21.33 45.00 2009 188.74 562.00 93.00 98.00 -9.91 13.23 20.39 228.44 -15.76 -14.53 13.85 15.45 49.65 170.07 400.00 14.00 11.82 22.00 2001 10. 50%B 17.00 21.07 9.81 535.92 6.39 24.55 12.36 9.00 2005 2006 60.39 189.61 25.60 66.00 16.95 412.37 7.00 2010 202.21 429.99 17.Capital Markets Composition Year APEX ADELCHI FOOTWEAR LTD APEX TANNERY BATA SHOE Basic EPS NAV per Share Net Profit After Tax (mn) Year End P/E % Dividend Basic EPS NAV per Share Net Profit After Tax (mn) Year End P/E % Divide nd Basic EPS NAV per Share Net Profit After Tax (mn) Y e ar E n d P/ E % Di vi de n d 2000 13.83 14.74 500.76 16.70 82.51 8.57 12.78 10.87 645.55 292.37 12.74 394.00 2004 57.74 35.76 10.26 24.15 169.30 28.43 254.42 211.18 43.65 17.01 151.29 14.35 29.13 17.61 15.00 15.63 12.00 2003 18.61 214.12 12.72 213.
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