1

Research
Research Please
Please refer
refer to
to last
last page
page for
for important
important disclaimers
disclaimers
 2

What's inside Executive Summary

▪ Global Outlook: Central banks globally are nearing the end of their tightening cycles, with the Federal Reserve signaling two
1. Global Outlook Tightening cycles additional rate hikes before reaching the cycle's conclusion. The economic slowdown and a banking crisis in the US have
nearing the end diminished the urgency for further sharp rate hikes. As a result, the likelihood of the Dollar index strengthening is low,
alleviating pressure on global currencies, including the Bangladeshi taka.

2. A Recap: Policy measures in ▪ Recap of policy measures in Bangladesh and its impact on the economy: In the past year, a contrast emerged
Bangladesh and its impact on the between major advanced economies adopting tight monetary policies with substantial interest rate hikes, while Bangladesh
economy pursued a macroeconomic strategy aimed at achieving low inflation, exchange rate stability, and stimulating economic growth
through low-interest rates. This pursuit of the "impossible trinity" resulted in macroeconomic imbalances, including high
inflation, currency depreciation, and a shortage of US dollars.
3. Macroeconomic Outlook: ▪ Macroeconomic Outlook H1’FY2024: Considering external factors and involvement in an IMF program, the central bank of
H1’FY2024 Bangladesh is scheduled to announce its monetary policy on 18th June. The central bank finds itself in a challenging situation
without any favorable options. Two policy paths lie before the central bank- an aggressive stance would help stabilize the
macroeconomic situation but potentially lead to slower growth and an increase in non-performing loans within the banking
4. Scenario 1: system. Conversely, opting for a progressive stance would support growth but may result in higher inflation, and further
Aggressive Response depreciation of the currency.

▪ a) Aggressive Response: Under the Aggressive Response, the policy measures will be aimed at tackling inflation and
5. Scenario 2: currency depreciation through tighter monetary policies. Based on the policy measures, CAL expects interest rates for 364-
Progressive Response day T-bills to be around 10.6% to 11%, c.7% depreciation of the taka against the dollar, and sustained elevated inflation of
approximately 8.2% to 8.5%.

▪ b) Progressive Response: Under the Progressive Response scenario, the policy measures will be aimed at prioritizing
6. Investment Strategy policies that promote growth over cautious approaches. Based on the policy measures, CAL expects interest rates for 364-
day T-bills to be around 8.3% to 8.6%, c.15% depreciation of the taka against the dollar, and an increase in inflation to 10.5%
to 11.0%.

▪ Investment Strategy: In the event of a potentially aggressive stance, we recommend a shift towards short-term fixed-
income securities to capture yield opportunities. In contrast, if a progressive approach is chosen, we recommend increasing
exposure to equities and real estate assets due to potential opportunities from debt monetization.

▪ Consistent with our usual practice, we will publish an updated forecast in our monetary policy review for H1’FY2024 based
on the adopted policy changes in the upcoming monetary policy statement by Bangladesh Bank.
 3

Towards Turning the Corner

Global Outlook: Tightening cycles
nearing the end
Globally, central banks are nearing the end of their tightening cycles, with the Fed projecting two more rate
hikes before the cycle ends. The recent banking crisis in the US, a slowdown in economic growth, and
declining inflation have reduced the need for sharp rate increases. Amid the economic slowdown and the
nearing end of tightening cycles by year-end, the likelihood of further strengthening in the Dollar index is low,
alleviating pressure on global currencies. A deteriorating banking crisis in the US could deepen the economic
woes, necessitating a more expeditious easing of the tightening cycle. However, elevated inflation and tighter
credit conditions in developed markets may impede growth and adversely impact imports in major
economies.
 4
1. Global Outlook i End of Tightening

Globally policy rates are expected to stay at elevated levels. However, central banks are
approaching the tail end of tightening cycles.
In June, the Fed kept interest rates unchanged after 10 straight increases but indicated European Central Bank (ECB) has slowed the pace of its interest rate increases in its last
two more hikes this year, aiming to push the rates to or above the median range of 5.5% policy decision. However, it conveyed a message of further tightening with the possibility
to 5.75%. According to the CME Fed Watch tracker of prices in the Fed funds futures of two further 25 bps rate hikes, in June and July which the market anticipates to be the
market, traders anticipate one additional hike in the policy rate, projecting it to reach a final stage of its fight against inflation.
peak of 5.5% before the tightening cycle concludes.

Fed Policy Rate (%) and Outlook ECB Policy Rate and Outlook
Market Expectation Market Expectation

5.50 5.50
5.25 5.25 3.75
5.00 5.00 Smallest hike of the cycle 3.50
3.25 0.25
4.50 3.00 0.25
0.25

1.00
2.00 Expected
3.25 end of the
tightening
cycle
1.25
0.75
1.75

1.25

0.50 65% 50% 36%

0.25 Policy Rate Hike (% points)
Probability -0.50 -0.50 -0.50 Repo Rate (%)
Dec-21

Dec-22

Mar-24E
Sep-23E
Mar-22

Jun-22

Mar-23

May-23
Sep-22

Jun-23

Dec-23E

Jul-23E
Dec-21

Dec-22

Jun-23E
Mar-22

Jun-22

Mar-23

May-23
Sep-22
Research Source: Fed, CME FedWatch, ECB
 5
1. Global Outlook i End of Tightening

Initiative to tame inflation through steep interest rate increases has resulted in a slowdown
in economic growth…
Inflation (%) Real GDP Growth _ QoQ (%)
13 US Euro Area UK US Euro Area UK
8

11

4
7

5
2

-1 -2
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
Jul-20

Jul-21

Jul-22
Mar-20

Sep-20

Mar-21

Mar-22

Sep-22

Mar-23
Jan-20

May-20

Jan-21

May-21

Sep-21

Jan-22

May-22

Jan-23
Nov-20

Nov-21

Nov-22

2021 2022 2023

Research Source: Fed, ECB, Office for National Statistics-UK

 6
1. Global Outlook i End of Tightening

... coupled with the recent banking crisis in the US, resulting in a decreased need for
significant rate hikes.
In a rising interest rate environment, some US banks have encountered difficulties due to Since March, three regional banks, namely Silicon Valley Bank, Signature, and First
their holdings of low-interest bonds. As the bond prices decreased, the market value of Republic, have failed, raising concerns among investors about the financial health of
their capital reserves also decreased, resulting in some banks incurring unrealized losses. other regional banks. The continuing decline of the US regional bank stocks has weighed
down the Regional Banking Index, indicating a potential systemic issue in the sector.

US 10-year Bond Yield (%) and Tier 1 Capital Ratio (%) Regional Banking Index

4.5 16 140
254 Bps increase
4.0
120

3.5
15
100
3.0

2.5 80
14
2.0 60

1.5
40
13
1.0
20
0.5
US 10-Year Bond Yield Tier 1 Capital as % of Risk-Weighted Assets _ Rhs
0.0 12 0
Mar-20
May-20
Jul-20

Mar-21
May-21
Jul-21

Mar-22
May-22
Jul-22

Mar-23
May-23
Sep-20

Sep-21

Sep-22
Jan-20

Jan-21

Jan-22

Jan-23
Nov-20

Nov-21

Nov-22

Dec-06

Dec-09

Dec-12

Dec-15

Dec-18

Dec-21
Jun-08

Jun-11

Jun-14

Jun-17

Jun-20

Jun-23
Research Source: Fed, Investing.com
 7
1. Global Outlook ii Weakened Dollar Index

Pressure on global currencies is expected to ease as the likelihood of further strengthening

in the Dollar index is low with the US nearing the end of rate hikes by the end of the year.
After a long period of strengthening of the U.S. dollar, attaining a 20-year peak in September last year, the U.S. dollar index experienced an approximate 9.6% decline till April
2023. The factors that drove the dollar's appreciation in the previous year are now expected to recede gradually, indicating the possibility of further softening in the dollar index.

US Dollar Index Tightening Cycle Nearing End

115 Monetary Policy Actions & Impact: US Dollar Index US Policy Rate 6
2008 Financial Crisis
110
5
105

100 4

95
3
90

85 2

80
1
75

70 0
May-05

May-06

May-07

May-08

May-09

May-10

May-11

May-12

May-13

May-14

May-15

May-16

May-17

May-18

May-19

May-20

May-21

May-22

May-23
Jan-05

Sep-05
Jan-06

Sep-06
Jan-07

Sep-07
Jan-08

Sep-08
Jan-09

Sep-09
Jan-10

Sep-10
Jan-11

Sep-11
Jan-12

Sep-12
Jan-13

Sep-13
Jan-14

Sep-14
Jan-15

Sep-15
Jan-16

Sep-16
Jan-17

Sep-17
Jan-18

Sep-18
Jan-19

Sep-19
Jan-20

Sep-20
Jan-21

Sep-21
Jan-22

Sep-22
Jan-23
300 Bps hike Rate Hike Balance Balance 500 Bps
in repo rate Cycle sheet sheet hike in
Nearing an reduced by increased repo rate
End 39% (Dec, by 64%
07- Jun,08)

Research Source: Fed

 8
1. Global Outlook ii Weakened Dollar Index

The combination of squeezed interest rate differentials and increased negative trade
balance will exert further pressure on the dollar.
Fed’s pause in tightening before other developed economy central banks may lead to a The current U.S. trade deficit standing at 3.2% of GDP, reflects the adverse impact of a
narrowing in interest rate differentials between the US and other developed markets strong dollar on the competitiveness of U.S. manufacturing. Conversely, a persistent high
which is likely to weigh on the dollar. negative current account can exert downward pressure on the dollar index, spurring
greater demand for overseas goods and services.

Developed Market Interest Rate Differentials (% points) US Current Account Balance as % of GDP

4.5 -6

4.0
-0.19
-5
3.5

3.0 0.27 -4
-3.2
2.5 0.70
US and international -3
2.0 10-year Govt. bold
yield difference 0.76

1.5 -2

-1.9
1.0
0.76 -1
0.5
1.46 US Euro Area UK
0.0 -0

Jul-09

Jul-11

Jul-13

Jul-15

Jul-17

Jul-19

Jul-21
Mar-08

Mar-10

Mar-12

Mar-14

Mar-16

Mar-18

Mar-20

Mar-22
Nov-08

Nov-10

Nov-12

Nov-14

Nov-16

Nov-18

Nov-20

Nov-22
Oct-20

Oct-21

Oct-22
Dec-20

Dec-21

Dec-22
Jun-20

Aug-20

Jun-21

Aug-21

Jun-22

Aug-22
Feb-21

Apr-21

Feb-22

Apr-22

Feb-23

Apr-23
-0.5

Research Source: Fed

 9
1. Global Outlook ii Weakened Dollar Index

Under the scenario of a deteriorating banking crisis in the US, the economy could be
pushed into a recession necessitating a swifter easing of the tightening cycle.
The recent turmoil in regional banks has created new headwinds for the US economy, As the Fed raised the policy rate 17 times from 1.0% to 5.25% between 2004 and 2006
heightening the risk of a recession later this year. Consequently, there is an anticipated leading to a burst in the housing bubble resulting in 157 bank failures. The financial crisis
tightening of bank lending conditions as banks are expected to prioritize enhancing the sent the economy into a deep recession with –a 5.1% decline in real GDP. (Currently, rate
quality of their balance sheets over pursuing growth, potentially impeding overall hikes have impacted the regional banks only and any worsening banking crisis may send
economic expansion. the economy into recession raising the need to easing of the tightening cycle.)

Bank Failures US Real GDP Growth YoY (%)

180 Bank Failures Total assets under the failed banks (Bn) - Rhs 600 Real GDP Growth YoY (%) US Policy Rate _Rhs
157 6 6.0
160 254 Bps rate
increase
140 500
140 4 5.0

120 400
2 4.0
100 92
300
0 3.0
80

60 51 200 -2 2.0

40
25 24 100 -4 1.0
18 Sharp rate cuts
20 11 8 8 with early signs
4 3 4 3 5 4 4 3 of recession
0 0 0 0 0
-6 0.0
0 0

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10
Aug-04

Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10
Apr-04

Apr-05

Apr-06

Apr-07

Apr-08

Apr-09

Apr-10
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023

Research Source: FDIC, Fed

 100
150
200
250
300
350
Jan-06
May-06
Sep-06
Jan-07
May-07

Research
1. Global Outlook

Sep-07
Import Scenario (USD Bn)

Jan-08
May-08
iii

Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Import Slowdown

Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
May-17
Sep-17
US

Jan-18
May-18
expected to weaken growth, impacting imports in the major markets.

Sep-18
Jan-19
May-19
Euro Area

Sep-19
Jan-20
May-20
Sep-20
Jan-21
May-21
Sep-21
Jan-22
May-22
High inflation, elevated interest rates, and tighter credit conditions in developed markets is

Sep-22
Jan-23
Source: Fed
10
 11

In Deep Water
A Recap: Policy Measures in Bangladesh
and its Impact on the Economy
In the past year, a contrast emerged between major advanced economies adopting tight monetary policies
with substantial interest rate hikes, while Bangladesh pursued a macroeconomic strategy aimed at achieving
low inflation, exchange rate stability, and stimulating economic growth through low-interest rates. This pursuit
of the "impossible trinity" resulted in macroeconomic imbalances, including high inflation, currency
depreciation, and a shortage of US dollars. The effectiveness of policies was hindered by lending rate caps,
while lower deposit rates spurred a liquidity shortage in the banking system.
 12
A Recap i A Recap of last 12 Months

What were the key policy measures driving the response in Bangladesh?"

with interest rate

cap and debt
monetization with the repo rate
hike aiming to
tame inflation
Interest
Rates

with intervention
in the forex
market through
USD sale

Research Source: CAL Research

 13
A Recap i A Recap of last 12 Months

What were the key policy measures driving our response?

% The policy rate has been raised by 100 basis points to 6.00%, while the lending cap for banks (except for
consumer loans and credit cards) has been maintained at 9%.

৳
To keep currency on stable footing, forex intervention involved the sale of USD 11.7 billion over a period of 10
months from July to April ‘23.
$

Higher bank borrowing targets to finance the budget deficit resulted in debt monetization of c. BDT 770 Bn by
BB in the first eleven months of this fiscal year.

Imposed import restrictions: including a ban on luxury imports and increased LC margins based on the
nature of the goods

Research Source: Bangladesh Bank

 14
A Recap ii Impact of Policy Measures

What were the outcomes based on the implemented policy measures?

Inflation in May soared to a decade-high of 9.94%.

The Bangladeshi Taka (BDT) experienced a 14% depreciation against the dollar

The Central Bank has been employing moral suasion to maintain the exchange rate.

Shortage of USD at the current exchange rate

Macroeconomic imbalances and the depletion of Foreign Exchange Reserves prompted Bangladesh to enroll
in an IMF program.

Research Source: Bangladesh Bank

 15
A Recap ii Impact of Policy Measures

A case study: The current policy response differs from those in the previous IMF program.
The significant increase in the policy rate, combined with the removal of rate caps, With a low-interest-rate policy in place, inflation has remained at elevated levels, unlike
facilitated the effective transmission of monetary policy across the economy during 2010- the previous IMF program.
2011, resulting in the successful containment of inflation within a brief timeframe.

Inflation and Interest Rate Scenario During 2011-12 Current Inflation and Interest Rate Scenario
Headline Inflation (%) 364 Day T-Bill Rate (%) Repo Rate (%) _ Rhs
Headline Inflation (%) 364 Day T-Bill Rate (%) Repo Rate (%) _ Rhs
14.0 10.0 12.0 8.00
IMF: Staff-Level
Agreement
7.50
12.0 10.0 Interest Rate
9.0
Below
Higher interest Inflation 7.00
10.0 rate swiftly
tamed inflation 8.0 8.0
6.50
8.0
7.0 6.0 6.00

6.0
5.50
6.0 4.0
4.0
5.00

5.0 2.0
2.0 4.50

0.0 4.0 0.0 4.00

Dec-19

Dec-20

Dec-21

Dec-22
Jun-19

Mar-20
Sep-19

Jun-20

Mar-21

Mar-22
Sep-20

Jun-21

Sep-21

Jun-22

Mar-23
Sep-22
Oct-10

Oct-11

Oct-12

Oct-13
Jul-10

Jul-11

Jul-12

Jul-13
Jan-10

Apr-10

Jan-11

Apr-11

Jan-12

Apr-12

Jan-13

Apr-13

Research Source: Bangladesh Bank, CAL Research

 16
A Recap ii Impact of Policy Measures

The policy direction has been oriented towards utilizing debt monetization as a tool to
maintain interest rates at a lower level…
The impact of the policy rate hike has been limited by the current interest rate cap, as the From June to March of FY-23, the BB injected substantial liquidity into the economy by
gap between the policy rate and lending rate has reached a historically low level. purchasing treasury assets worth BDT 549 bn, thereby keeping interest rates lower.

Repo Rate (%) vs Lending Rate (%) Interest Rate (%) Vs BB’s Asset Purchase (BDT Bn)

Transmission 1,200 Central bank's holding of G-Sec. 364-Days T-Bill Rate (Rhs) 9%
9.5 Introduction hindered
of Rate Cap
8%
1,000
8.5
7%

3.83
800 6%
7.5

5%
1.29 600
6.5
4%

400 3%
5.5

2%
4.5 200
1%
Repo Rate (%) Lending Rate(%)

3.5 0 0%

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22
Mar-19

Jun-19

Mar-20
Sep-19

Jun-20

Mar-21

Mar-23
Sep-20

Jun-21

Mar-22
Sep-21

Jun-22

Sep-22
Jul-19

Jul-20

Jul-21

Jul-22
Jan-19

Jan-20

Jan-21

Jan-22

Jan-23

Research Source: Bangladesh Bank

 17
A Recap ii Impact of Policy Measures

…while the prevailing negative real deposit rates have contributed to a liquidity shortage in
the market, prompting the central bank to extend support through the repo market.

Due to negative real interest rates, deposit growth in the banking system has sharply In response to the existing liquidity shortage in the banking sector, the central bank has
declined, leading to a liquidity shortage in the banking system. been offering support through the repo market.

Deposit Growth vs Real Interest Rate (%) Repo with Bangladesh Bank

16% Real Interest Rate (%) - Rhs Growth in Deposit with DMBs 1% 900 Amount (BDT Bn) Cut-off rate(%) -Rhs 6.5

800
14% 0%
6
700
12%
-1%
600
10% 5.5
-2% 500
8%
400
-3% 5
6%
300
-4%
4% 200
4.5

2% -5% 100

0% -6% 0 4

Aug-22

Oct-22

Dec-22
Mar-22

Jun-22

Jul-22

Mar-23
Jan-22

May-22

May-23
Sep-22

Jan-23
Feb-22

Apr-22

Feb-23
Nov-22

Apr-23
Mar-20
May-20
Jul-20

Mar-21
May-21
Jul-21

Mar-22
May-22
Jul-22

Mar-23
Sep-20

Sep-21

Sep-22
Jan-20

Jan-21

Jan-22

Jan-23
Nov-20

Nov-21

Nov-22

Research Source: Bangladesh Bank, CAL Research

 18

Between the Devil and the

% ৳ Deep Blue Sea
Macroeconomic Outlook: H1’FY2024
Considering external factors and involvement in an IMF program, the central bank of Bangladesh is scheduled
to announce its monetary policy on June 18th. The central bank finds itself in a challenging situation without
any favorable options. Two policy paths lie before the central bank- an aggressive stance focused on
controlling inflation and ensuring currency stability or a progressive approach prioritizing growth. The
macroeconomic outlook hinges on the central bank's response to IMF recommendations and choice between
prudence and fostering growth.
 19
Macroeconomic Outlook i IMF Recommendations

The adoption of IMF’s recommendations can act as a catalyst in rectifying macroeconomic

imbalances through policy adjustments.
Bangladesh's post-pandemic economic recovery was disrupted by Russia's conflict in Ukraine, resulting in a significant current account deficit, Taka depreciation, and declining
foreign exchange reserves. Consequently, Bangladesh sought a $4.7 billion IMF loan under the ECF/EFF and RSF arrangements. Under the program, IMF recommended reform
aiming at restoring macroeconomic stability, easing financing constraints, rebuilding reserves, and modernizing the monetary policy framework will play a vital role in guiding
Bangladesh's monetary decisions this year.
A summary is given below highlighting which IMF reform recommendation will impact the three key macro variables; Interest rate, exchange rate, and inflation.

Interest Rate Exchange Rate Inflation

Interest rate corridor:

Floor on net international reserves (Jun-
Adopt an interest rate corridor system with
23 onwards)
automatic standing lending and deposit
facilities. (Jul-23)
Unified Exchange Rate:
market-determined exchange rate for all
Monetary policy framework: Move away
official FX transactions (Jun-23)
from reserve money to the interest rate as Subsidies Rationalization:
an operational target. (Program Period) Adopt a periodic formula-based price
Reserve Calculation:
adjustment mechanism for petroleum
Reporting the official Gross International
Cap Removal: Products (Dec-23)
Reserves (GIR) as per BPM6. (Jun-23)
Remove all interest rate caps. (Program
Period)
Easing import restrictions:
Reverse the temporary increases in margins
Reduce NSC issuance (Program Period)
for opening letters of credit on nonessential
imports.
Ceiling on reserve money*

* Indicative target

Research Source: IMF

 20
Macroeconomic Outlook ii Possible Policy Scenario

Scenario 1: Aggressive policy stance to restore macroeconomic stability

The upcoming Monetary Policy Statement (MPS) to be announced in June will depict how the Bangladesh Bank (BB) responds to IMF recommendations to address the
macroeconomic challenges in the first half of FY-2024. The outcome of this policy decision will have a significant impact on the economic landscape in the months ahead. Here is
a summary of the policy actions and the outlook under the first scenario “Aggressive Response”.

Aggressive Response
Due to declining foreign exchange reserves and higher inflation, BB has the option to implement a policy focused on curbing inflation and controlling currency
depreciation. In line with IMF recommendations, the central bank is expected to use interest rates as an operational tool for monetary policy to address inflation
and adopt market-determined exchange rates for official foreign exchange transactions. This necessitates the adoption of a tighter monetary policy approach.
However, the aggressive tightening might dent economic growth while increasing NPL in the banking system.

CAL’s View:

Policy actions under the “Aggressive Response” scenario: How will these policy measures translate into the Macro
Variables?

Interest Rate 10.6% - 11.0%

❖ Increase the policy rate by 175 to 200 bps (364 days T-bills)

❖ Move away from money printing to fund Budget deficit and fund mainly
6% - 8% depreciation of the taka
through commercial banks at market-determined rates Exchange Rate against the USD
❖ Removal of the lending rate cap

❖ Floating the currency and Gradual removal of restrictions on imports Inflation Rate 8.2% - 8.5%

Research Source: CAL Research Estimates

 21
Macroeconomic Outlook ii Possible Policy Scenario

Scenario 2: Progressive policy stance prioritizing growth over caution

If the central bank aims for a progressive approach prioritizing growth here is a summary of the policy actions and the outlook under the second scenario “Progressive
Response”.

Progressive Response
In the "Progressive Response" scenario, prioritizing policies that do not significantly impede growth will be favored over caution. As a result, the increase in the
policy rate might be less than the required level. Additionally, devolvement from the central bank may persist, limiting the extent of the interest rate increase,
which would lead to higher inflation and a larger depreciation of the currency.

CAL’s View:
Policy actions under the “Progressive Response” scenario: How will these policy measures translate into the Macro
Variables?

Interest Rate 8.3% - 8.6%

❖ Increase in the policy rate by 25 to 50 bps (364 days T-bills)

❖ Continue to fund Budget deficit through debt monetization

14%-16% depreciation of the taka
❖ Stricter restrictions on imports
Exchange Rate against the USD

❖ Will float the currency but will continue to employ moral suasion to
influence exchange rates Inflation Rate 10.5% - 11.0%

Research Source: CAL Research Estimates

 22
Macroeconomic Outlook iii Forecast Review

How our outlook for Q1’2023 and the actual numbers compare?
Actual Actual
Macro Indicator Forecast Comment
(Jan’23) (Mar’23)

Actual inflation was in line with our

Inflation Rate 8.71% 9.0% 9.33%
expectations.

The central bank maintained an

Policy Rate 6% 6.25% 6% accommodative stance during the period
with a debt monetization of BDT 63 Bn

From January to March 2023, BB intervened

in the forex market with a sale of USD 3.12
Exchange Rate 104.0 114.6 106.7
Bn limiting the currency depreciation at a
cost of reserve depletion.

Research Source: Bangladesh Bank, BBS, CAL Research

 23

Stemming the Tide

Scenario 1: Aggressive Response
Under the Aggressive Response, the policy measures will be aimed at tackling inflation and currency
depreciation through tighter monetary policies. This involves increasing the policy rate, reducing reliance
on debt monetization, eliminating lending rate caps, and allowing the currency to float. Based on the
policy measures, CAL expects interest rates for 364-day T-bills to be around 10.6% to 11%, c.7%
depreciation of the taka against the dollar, and sustained elevated inflation of approximately 8.2% to 8.5%.
 24
Exchange Rate Outlook Overview

CAL expects BDT to depreciate by 6%-8% by the end of 2023E, but any immediate shocks
resulting from adopting a market-determined exchange rate are likely to be minimized.
Exchange Rate (BDT/USD)

118
What factors will influence the exchange rate?
115 115
Depreciation Drivers Easing Factors

108
Global Monetary
105 BOP Pressure Easing

Interest Rate Commodity

95
Differentials Cooling

Reduced Forex
85 Intervention

Dollar Shortage
75
Dec-23E
Oct-17

Oct-18

Oct-19

Oct-20

Oct-21

Oct-22
Jul-17

Jul-18

Jul-19

Jul-20

Jul-21

Jul-22
Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Jan-23
Apr-17

Apr-18

Apr-19

Apr-20

Apr-21

Apr-22

Apr-23

Research Source: Bangladesh Bank, CAL Research Estimates

 25
Exchange Rate Outlook i Global Monetary Easing

Relief is in sight for BDT from the expected easing of external depreciation pressure with major
central banks nearing the end of their tightening cycle or slowing the pace of tightening…
The European Central Bank (ECB) has reduced the speed at which it was raising interest The strengthening of the US dollar followed by the series of steep rate hikes has
rates while the US is also nearing the end of significant rate hikes aimed at mitigating significantly impacted the performances of the global currencies. From Jan-Sep 2022, the
inflation. Dollar Index rose by 16.8%, causing a 15.5% depreciation in BDT. As the Fed's tightening
cycle nears its end, the likelihood of the Dollar index strengthening reduces, alleviating
external pressure on BDT.

Policy Rate Hikes by Central Banks (bps) US Dollar Index and Currency Depreciation

600 115 US Dollar Index Y-o-Y Currency Depreciation _ BDT(%) 25%

500 20%
110
US

400 15%
UK
105
Euro Zone
300 10%
India
100
200 5%

Bangladesh
95
100 0%

0 90 -5%

Mar-19
May-19
Jul-19

Mar-20
May-20
Jul-20

Mar-21
May-21
Jul-21

Mar-22
May-22
Jul-22

Mar-23
May-23
Sep-19

Sep-20

Sep-21

Sep-22
Jan-19

Jan-20

Jan-21

Jan-22

Jan-23
Nov-19

Nov-20

Nov-21

Nov-22
Research Source: Fed, ECB, BOE, Bangladesh Bank, RBI, investing.com
 26
Exchange Rate Outlook ii Commodity Cooling

...while the downward trajectory of the commodity price cycle is anticipated to further
alleviate pressures.
Commodity Price Index and Exchange Rate Rebased Price of the Major Import Items of Bangladesh

110 34% ↓ 250

120

110
105
200
100
Import
100 Weight
90
150

95 80

100
70
Lagged impact
90

60
50
85
50

Exchange Rate All Commocity Price Index _ Rhs Crude oil Soybean oil Wheat Cotton Iron ore
40
80 0

Oct-22

Dec-22
Mar-22

May-22

Jun-22

Jul-22

Aug-22

Mar-23

May-23
Sep-22

Jan-23
Apr-22

Feb-23
Nov-22

Apr-23
May-17

May-18

May-19

May-20

May-21

May-22

May-23
Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22
Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Jan-23

* Crude Petroleum & Petroleum Products ** Oil seeds & edible oil # Cotton, yarn, fiber & textile articles
## Iron & Steel

Research Source: World Bank, Bangladesh Bank, CAL Research

 27
Exchange Rate Outlook ii Commodity Cooling

Ease in the external factors has minimized the trade gap, while stable remittances have
improved the current account balance.
Trade Gap and Remittance (USD Mn) Current Account Balance (USD Mn)

Remittance started to offsetting 1000 FY-23 FY-22

4500 Remittance (USD Mn) the negative trade balance
Net Import (USD Mn) Covid -19 and Russia-
Ukraine War 500
4000

3500 0

3000
-500

2500

-1000
2000

1500 -1500

1000
-2000

500
-2500
0
May-17

May-18

May-19

May-20

May-21

May-22
Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22
Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Jan-23

-3000
Sep Oct Nov Dec Jan Feb Mar Apr

Research Source: Bangladesh Bank

 28
Exchange Rate Outlook iii BOP Pressure

However, export is expected to slow down as signaled by declining apparel raw material
imports owing to depressed consumer sentiment in the major apparel markets.
Export Growth _YoY (%) Raw Material Import for RMG (BDT Cr.)

60% 15,000
Real Decline
Jul-Mar _YoY (%)
13,000
50%
11,000 10%
40%
9,000
(Adjusted for
30% currency and
7,000 cotton price)
FY-21 FY-22 FY-23
20% 5,000
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
10% Consumer Confidence in the Major Apparel Markets

110 US Index of Consumer Sentiment EU Consumer Confidence Indicator _Rhs 0

0%
100 -5

-10% 90 -10

80 -15
-20% 70 -20

60 -25
-30%
50 -30
Oct-22
Jul-22

Dec-22
Mar-22

May-22

Jun-22

Aug-22

Mar-23
Sep-22
Jan-22

Feb-22

Apr-22

Jan-23

Feb-23

Apr-23
Nov-22

Oct-19

Oct-20

Oct-21

Oct-22
Jul-19

Jul-20

Jul-21

Jul-22
Jan-20

Jan-21

Jan-22

Jan-23
Apr-19

Apr-20

Apr-21

Apr-22

Apr-23
Research Source: Bangladesh Bank, University of Michigan, European Commission
 29
Exchange Rate Outlook iv Interest Rate Differential

Lower rate hikes in Bangladesh compared to the US have narrowed interest rate differentials,
negatively impacted the financial account, and stressed the balance of payments.
Policy Rate Difference and Currency Depreciation Financial Account (USD Mn)

Repo rate gap with US (% Points) BDT Depreciation (%) _Rhs Financial account (USD Mn) _ Rhs Repo Rate (%) _ US Repo Rate (%) _ BD
9 25%
10 15000
8
20% 9 13000

7
8
11000
15%
6 7
9000
10% 6
5
7000
5
4
5% 5000
4
3
3000
0% 3
2 1000
Historical lowest policy 2
rate gap with the US -5%
1 -1000
1

0 -10% 0 -3000

FY-23*
FY-07

FY-08

FY-09

FY-10

FY-11

FY-12

FY-13

FY-14

FY-15

FY-16

FY-17

FY-18

FY-19

FY-20

FY-21

FY-22
Jul-08
Mar-09

Jul-10
Mar-11

Jul-12
Mar-13

Jul-14
Mar-15

Jul-16
Mar-17

Jul-18
Mar-19

Jul-20
Mar-21

Jul-22
Mar-23
Nov-09

Nov-11

Nov-13

Nov-15

Nov-17

Nov-19

Nov-21

Research Source: Fed, Bangladesh Bank, CAL Research

 30
Exchange Rate Outlook v Reduced Forex Intervention

IMF's QPC requirements will limit the central bank's ability to sell USD while the reserve
coverage dipping down ten-year low is raising the need for reserve accumulation.
FX Reserve and QPC (Quantitative Performance Criteria) by IMF (USD Bn) Reserve Coverage (Months of Import)

Minimum Reserve Requirement under QPC

12
26.8

25.3
10
24.5

Under BPM6, Forex

Reserve will fall short of
the IMF QPC 8

Oct-14
Dec-12

Jul-17
Jun-07

May-08

Mar-10

Sep-15

Aug-16

Jun-18

May-19

Mar-21
Apr-09

Feb-11

Jan-12

Apr-20

Feb-22

Jan-23
Nov-13
Current Jun-23 Sep-23 Dec-23

Research Source: Bangladesh Bank, IMF

 31
Exchange Rate Outlook vi Dollar Shortage

It is evident that at the current exchange rate, there is not a required supply of dollars causing
an uptick in deferred payments which has already squeezed the supply of imported items.
Any disruption in production owing to load-shedding and reduced capital machinery imports might deteriorate the domestic supply pushing the import requirements even higher.

Import of Petroleum Goods (USD Bn) Import of Capital Goods (USD Bn)
(Jul-Mar) (Jul-Mar)
Real Decline (Jul-Mar) _YoY (%)

OIL | SHIPPING — 19 May 2023 | 06:53 UTC

(Adjusted for oil 12.7
5.6 price change.
The average oil 10.4
Fuel suppliers threaten to stop shipments to Bangladesh 24% price was 7%
higher during
amid payment delays: BPC Jul-Mar, FY-23).
HIGHLIGHTS
Bangladesh Petroleum owes around $297.49 million to oil product suppliers 4.7
BPC struggling to pay dues in US dollars due to plunging forex reserves

FY-22 FY-23 FY-22 FY-23

Daily Average Loadshedding (MW)

2022 2023
900

700

500

After the Rampal power plant halted its operations for coal shortage on 14 January, the Payra 300
power plant is also facing closure owing to the same problem stemming from the crisis of
dollars needed to pay coal import bills. 100
-
(100) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Research Source: Bangladesh Bank, BPDB, Newspapers

 32
Interest Rate Outlook Overview

CAL expects the policy rate to increase by 175-200 basis points by the end of 2023E to
address inflationary pressure.
Policy Rate (%)

8.0 8.00
7.75 What factors will influence interest rate?
7.5

7.0
Inflation
6.5

6.0
6.00 Currency Stability
5.5

5.0
Lagged Transmission
4.5

4.0
Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22
Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22

Dec-23E

Research Source: Bangladesh Bank, CAL Research Estimates

 33
Interest Rate Outlook i Inflation

CAL expects inflation to stay elevated at around 8.5% by the end of 2023E.
The tightening of the policy stance is likely to lead to a decline in inflation from its current levels. However, the current accommodative monetary stance, characterized by a 15.4%
growth in domestic assets, indicates that the injection of new money into the economy will likely keep inflation at elevated levels.

Headline Inflation (%) Domestic Asset Growth (%)

9.9 17%
10.0

16%
9.5

15%
9.0
8.5
14%
8.5

8.2 13%
8.0

12%
7.5
Pre-Covid
Average
11%
7.0

10%
6.5

9%
6.0

8%
5.5

7%
5.0

May-15

May-16

May-17

May-18

May-19

May-20

May-21

May-22
Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22
Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Jan-23
Dec-23E
Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22
Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22

Research Source: Bangladesh Bank, BBS, CAL Research Estimates

 34
Interest Rate Outlook i Inflation

Expected tariff hikes and full transmission of current tariff hikes will keep inflation elevated.
Gas Tariffs for Captive Power (BDT/M3) Retail Electricity Tariff (BDT/KWH)

88% 5%

30.0
8.25
5%
Titas Gas
Proposal for a
retail gas tariff 47.3%
7.86
hike 5%

Another tariff increase expected

16% 7.49

16.0
7.13
13.85 13.85 13.85

6.85
9.62 9.62
8.36
6.50

Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22 Jun-23* Sep-15 Dec-17 Mar-20 Jan-23 Feb-23 Mar-23 Jun-23 E

Research Source: BERC

 35
Interest Rate Outlook i Inflation

The expected depreciation of the currency is likely to trigger inflationary pressures

from imported goods.
During the 2010-11 period, a significant currency depreciation contributed to inflationary pressures, which were already rising due to increasing commodity prices. Since the beginning of
2022, substantial currency depreciation has already driven inflation to higher levels. Anticipated currency depreciation in 2023E is expected to keep inflation at elevated levels.

Exchange Rate and Inflation

14 Headline Inflation (%) Exchange Rate (BDT/USD) _ Rhs 110

105
12

100
10
95

8 90

6 85

80
4
75

2
70

0 65
Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19

Oct-20

Oct-21

Oct-22
Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-20

Jul-21

Jul-22
Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Jan-23
Apr-11

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Apr-17

Apr-18

Apr-19

Apr-20

Apr-21

Apr-22
Research Source: Bangladesh Bank, BBS
 36
Interest Rate Outlook i Inflation

Amidst the challenging domestic factors, the cooling of commodity prices and lower freight
costs on the global front will help ease some pressure on inflation.
Rebased Commodity Price (January 2021 = 100) Freight rate Index (FBX)

225
Forecast 12,000
205

185 10,000

165

8,000
145

125
6,000
105

85 4,000

65

2,000
45

25
0
Oct-21

Oct-22
Jul-21

Jul-22

Q3 23

Q4 23
Jan-21

Apr-21

Jan-22

Apr-22

Jan-23

Apr-23

Oct-20

Oct-21

Oct-22
Jul-20

Jul-21

Jul-22
Jan-20

Apr-20

Jan-21

Apr-21

Jan-22

Apr-22

Jan-23

Apr-23
Brent Crude Wheat Cotton Iron Ore Copper

Research Source: Bloomberg, Freightos Data

 37
Interest Rate Outlook i Inflation

CAL expects the 364-Days T-Bill yield to increase by 270-310 bps by the end of 2023E as the BB
adopts interest rate as an operational target to combat inflation, in line with IMF recommendation.
Following the implementation of the lending rate cap, inflation has surpassed the deposit rate, resulting in a negative real return, and it has even surpassed the lending rate, leading to a
cheaper borrowing environment. The low borrowing rates have contributed to further inflation. However, CAL expects as monetary policy stances from June 2023 will be guided by
inflation, the pace of devolvement from the central bank will slow down allowing effective transmission of the policy rate hikes.
364-Day’s T-bill Rate (%) Headline Inflation Vs Interest Rates (%)

12.0 16 Deposit Rate (%) Lending Rate(%) Headline Inflation (%)

11.0
14
10.0 10.6
Introduction
12 of Rate Cap
8.0 9.9
7.9 10

6.0 8

7.29
6
4.0

4 4.38

2.0
2

0.0 0
Oct-17

Oct-18

Oct-19

Oct-20

Oct-21

Oct-22
Jul-17

Jul-18

Jul-19

Jul-20

Jul-21

Jul-22
Jan-17
Apr-17

Jan-18
Apr-18

Jan-19
Apr-19

Jan-20
Apr-20

Jan-21
Apr-21

Jan-22
Apr-22

Jan-23
Apr-23

Dec-23E

May-09

May-11

May-13

May-15

May-17

May-19

May-21

May-23
Sep-08

Sep-10

Sep-12

Sep-14

Sep-16

Sep-18

Sep-20

Sep-22
Jan-10

Jan-12

Jan-14

Jan-16

Jan-18

Jan-20

Jan-22
Research Source: Bangladesh Bank, CAL Research Estimates
 38
Interest Rate Outlook ii Currency Stability

Adaptation of a market-determined exchange rate will necessitate a policy rate hike to

stabilize the currency mirroring the approach taken in the previous IMF Program.
In the previous IMF program, the central bank notably raised the policy rate prior to transitioning to a market-determined exchange rate. As a result, in the subsequent market-
determined regime, after an initial shock, the exchange rate stabilized and began to appreciate.
Repo Rate (%) Exchange Rate and Central Bank Intervention
Exchange Rate (BDT/USD) FX Reserve (USD Mn) _ Rhs
85 19,000
8.0 IMF: Staff-Level IMF: Staff-Level
Agreement Agreement
83 18,000
7.5
81 17,000

7.0
79 Higher interest 16,000
rates turned
6.5 77 financial account 15,000
positive
stabilizing currency
6.0 75 14,000

73 13,000
5.5
71 12,000
5.0
69 11,000
Market Determined
4.5 exchange rate
67 10,000
helped reserve
Repo Rate (%) build-up
4.0 65 9,000
Oct-10

Oct-11

Oct-12

Oct-13

Oct-10

Oct-11

Oct-12

Oct-13
Jul-10

Jul-11

Jul-12

Jul-13

Jul-10

Jul-11

Jul-12

Jul-13
Jan-10

Apr-10

Jan-11

Apr-11

Jan-12

Apr-12

Jan-13

Apr-13

Jan-10

Apr-10

Jan-11

Apr-11

Jan-12

Apr-12

Jan-13

Apr-13
Research Source: Bangladesh Bank
 39
Interest Rate Outlook iii Lagged Transmission

Lending rates will increase to double digits after the adaptation of a benchmark lending rate
system owing to the lagged transmission of the mounted policy pressures.
Interest Rate (%)

Spread Squeezed
13.5

11.5

9.5 Introduction
of Rate Cap

7.5 4.07

2.91
5.5

Deposit Rate (%) Lending Rate(%)

3.5
Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22
Mar-11
Jun-11

Mar-12

Mar-13

Mar-14

Mar-15
Sep-11

Jun-12
Sep-12

Jun-13
Sep-13

Jun-14
Sep-14

Jun-15

Mar-16

Mar-17
Sep-15

Jun-16
Sep-16

Jun-17

Mar-18
Sep-17

Jun-18

Mar-19
Sep-18

Jun-19

Mar-20

Mar-21

Mar-22

Mar-23
Sep-19

Jun-20
Sep-20

Jun-21
Sep-21

Jun-22
Sep-22
Research Source: Bangladesh Bank
 40
Interest Rate Outlook iv Risk Factor

Based on historical precedents, a significant increase in interest rates has the potential to lead
to a buildup of non-performing loans (NPLs) in the banking sector.
Interest Rate Vs. NPL (non-performing loan) Ratio (%)

15 A sharp rate Lending Rate (%) NPL Ratio (%)

rise led to a
surge in NPL
14

13

12

11

10

5
Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-20

Jul-21

Jul-22
Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23
Nov-06

Nov-07

Nov-08

Nov-09

Nov-10

Nov-11

Nov-12

Nov-13

Nov-14

Nov-15

Nov-16

Nov-17

Nov-18

Nov-19

Nov-20

Nov-21

Nov-22
Research Source: Bangladesh Bank
 41

An Even Keel
Scenario 2: Progressive Response
Under the Progressive Response scenario, the policy measures will be aimed at prioritizing policies that
promote growth over cautious approaches. Consequently, the policy rate may see a lower increase than
necessary. Additionally, debt monetization and stricter import restrictions are expected to continue.
Although the currency may be allowed to float, the policy measures will continue to exert influence through
moral suasion to manage exchange rates resulting in continued dollar shortages. Based on the policy
measures, CAL expects interest rates for 364-day T-bills to be around 8.3% to 8.6%, c.15% depreciation of
the taka against the dollar, and an increase in inflation to 10.5% to 11.0%.
 42
Progressive Response i Interest Rate Outlook

If BB prioritizes growth over caution keeping a cheaper borrowing environment, CAL expects the
policy rate to increase by 25-50 bps and 364-Days T-Bill yield by 40-70 bps by the end of 2023E.
Policy Rate (%) 364-Day’s T-bill Rate (%)

8.0 9.0
8.6

7.5 8.0 8.3

7.9
7.0
7.0

6.50 6.0
6.5

5.0
6.25
6.0
6.00
4.0

5.5
3.0

5.0
2.0

4.5
1.0

4.0 0.0

Dec-23E
Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22
Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22

Dec-23E

Oct-17

Oct-18

Oct-19

Oct-20

Oct-21

Oct-22
Jul-17

Jul-18

Jul-19

Jul-20

Jul-21

Jul-22
Jan-17
Apr-17

Jan-18
Apr-18

Jan-19
Apr-19

Jan-20
Apr-20

Jan-21
Apr-21

Jan-22
Apr-22

Jan-23
Apr-23
Research Source: CAL Research Estimates
 43
Progressive Response ii Debt Monetization

Heavy reliance on borrowing from the banking system for budget deficit financing is
expected to be financed through debt monetization.
Budget Deficit & Deficit Financing (BDT Bn) Government’s Bank Borrowing Target Vs BB’s Asset Purchase (BDT Bn)
Net Borrowings: 1,400
-
7.6%
(500)
(638) 1,200
(760)
(500) (977) (955) (1,025) Foreign
5.6%

(420) 1,000 Covid-19

(474) 3.6%
(1,000)
(292)
(850) 800
(300)
(765) 1.6%
(1,500) (1,063)
600
(250)
(1,324) Bank
-0.4%

(370)
(2,000) 400
-2.4% Pre-Covid Avg.
(400)
200
(2,500) (230) Non-Bank
-4.4%
-4.8% -4.9%
-5.2%
-5.4% Deficit as -
-5.9% % of GDP
-6.1% FY-17 FY-18 FY-19 FY-20 FY-21 FY-22 FY-23* FY-24
(3,000) -6.4%
2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 Budget: Borrowing target from Banking System (Net) Central Bank's holding of G-Sec.
*Asset Purchase data till March-23

Research Source: Bangladesh Bank

 44
Progressive Response ii Debt Monetization

With the depletion of Forex reserves, reduced sales of dollars will no longer be able to adequately
counter the necessary debt monetization, leading to an expansion in the money supply. Under
progressive response, CAL expects BDT to depreciate by 14%-16% by the end of 2023E.
Up until May of FY23, the central bank intervened in the foreign exchange market with a net sale of USD 12.62 Bn and absorbed nearly BDT 1.3 Tn from the economy. These substantial
USD sales offset the significant debt monetization by the central bank. Nevertheless, a sharp decline in USD sales is anticipated to hinder liquidity management operations. As a result,
an increased supply of domestic assets amid declining foreign assets would lead to steeper currency depreciation.

Liquidity Mop up through USD Central Bank’s USD Sales (USD Mn) Exchange Rate Forecast (BDT/USD)
Sales (BDT Bn)
1,315 128
1,430 128
1,397
125

118
1,220

108 108

642
970
930
98

88

78

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22
Aug-17

Aug-18

Aug-19

Aug-20

Aug-21

Aug-22
Apr-17

Apr-18

Apr-19

Apr-20

Apr-21

Apr-22

Apr-23

Dec-23E
FY-22 FY-23*
* Up to May Nov-22 Dec-22 Jan-23 Feb-23 Mar-23
(Calculated using period average exchange rate)

Research Source: Bangladesh Bank, CAL Research

 45
Progressive Response iv Inflation Outlook

CAL expects in a scenario of slowing real growth, an increase in broad money supply can
reignite credit growth to non-productive sectors pushing inflation to reach 10.5% to 11.0%.
The current declining credit trend suggests reduced demand for funds for business expansionary activities. Increasing the money supply in this situation could reignite credit growth,
leading to funds being allocated towards unproductive activities, thereby exacerbating inflation.
Money Supply and Credit Growth (%) Headline Inflation (%)
11.0
M2 Growth (%) Private Sector Credit Growth (%) 11

19%
10.5
10
9.9
17%

9
15%

8
13%

7
11%

9% 6

7% 5

Dec-23E
Oct-17

Oct-18

Oct-19

Oct-20

Oct-21

Oct-22
Apr-17
Jul-17

Apr-18
Jul-18

Apr-19
Jul-19

Apr-20
Jul-20

Apr-21
Jul-21

Apr-22
Jul-22
Jan-17

Jan-18

Jan-19

Jan-20

Jan-21

Jan-22

Jan-23

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22
Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22
Research Source: Bangladesh Bank, CAL Research Estimates
 46

Steering Through Policy Wave

৳
Investment Strategy
In case of the adoption of an aggressive stance by the central bank, CAL recommends a strategic
repositioning towards an increased allocation in short-term fixed-income securities. This tactical move is
driven by our outlook for a significant surge in interest rates. By proactively adjusting investment portfolios
to capture the potential yield opportunities, investors can aim to enhance risk-adjusted returns in this
dynamic market environment. However, if the central bank opts for a progressive approach, we recommend
increasing exposure to equities and real estate assets.
 47
Investment Strategy

CAL’s view on different asset classes in H1’FY2024

Asset Class View Tightening Status Quo

We are underweight on equities if the central bank opts for hiking

interest rates as investors are likely to move towards fixed income-
Equities generating assets. However, status quo will increase broad money
growth, leading investment funds to flow into risky assets in search
of higher returns.

Short Term Fixed Income We are overweight on short-term fixed-income securities under both
scenarios due to expected interest rate increases in 2023 and a flat
Securities yield curve, making long-term bonds less attractive.

For the status quo scenario, we maintain an underweight position in

Long Term Fixed Income long-term fixed-income securities due to anticipated future interest
rate hikes. Conversely, in a tightening scenario, we would advise
Securities locking in rates promptly if interest rates begin to reach their peak.

Underweight Neutral Overweight

Research
 Equities 48

Double whammy: CAL expects corporate earnings to record a 5% YoY degrowth by Dec
2023E…
Corporate earnings are likely to get worse before getting better on the back of tightened business environment. With elevated inflation levels forecasted for 2023E, we
anticipate a decline in consumer demand, which will negatively impact corporate earnings.

Corporate Earnings (BDT Bn)

80.00 25.0%
75 76 75 Both upward movements in the interest
75.00 20.0%
rate and exchange rate are expected occur
by Dec 2023
70.00 68 15.0%

64 64
65.00 10.0%
60 60
60.00 59 5.0%
57
54
55.00 0.0%

50.00 -5.0%

45.00 -10.0%

40.00 -15.0%

35.00 -20.0%

30.00 -25.0%
30-Jun-21 30-Sep-21 31-Dec-21 31-Mar-22 30-Jun-22 30-Sep-22 30-Dec-22 31-Mar-23 30-Jun-23 29-Sep-23 29-Dec-23

Net earnings Change (Rhs)

*Earnings have been calculated based on selected 250 companies, excluding mutual funds, Life insurance companies
*NBL has been removed due to extraordinary loss incurred by the company in Dec’2022 quarter

Research Source: Company quarterly reports, CAL research estimates

 Equities 49

...stemming from the adverse impact of a weaker local currency, and increased interest
expenses.
In the September 2022 quarter, listed companies saw a 10% YoY decrease in their bottom line due to increased finance expenses from currency exchange loss and interest rate
expenses. We expect a continuation of this trend in 2023E.
Net Debt (BDT Mn) Foreign Exchange Loss (BDT Mn)

80,000 30% 3,000 200%

174%
70,000 25% 180%
2,500
144% 146% 160%
60,000 20%

140%
50,000 15% 2,000
120%
40,000 10% 95%
1,500 100%
30,000 5%
80%
20,000 0% 1,000
60%

10,000 -5%
40%
500 15%
- -10% 20%
2%

- 0%
WALTONHIL BATASHOE GPHISPAT RENATA IFADAUTO GP

Net Debt 5-Years CAGR (Rhs) FX loss (BDT Mn) FX loss as % of operating income (Rhs)

Research Source: Company annual and quarterly reports

 Equities 50

In the progressive scenario, increased broad money growth will lead investment funds
to flow into risky assets in search of higher returns.
DSEX vs Broad Money and Private Sector Credit Growth

9500

8500 DSEX

7500

6500

5500

4500 30% 51%

54% Market return Market return
3500 Market return
2500
35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%
Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Jun-17

Jun-18

Jun-19

Jun-20

Jun-21

Jun-22

Jun-23
Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22

Dec-23
Pvt. Sector Cr. Gr. (%) Broad Money (%)

Research Source: Bangladesh Bank, Dhaka stock exchange

 Equities 51

However, based on aggressive scenario, with tighter monetary policy, investor funds
will likely flow into safer bets toward fixed-income-generating asset classes, creating the
need for portfolio rebalancing
DSEX (Points) vs. 364 Days T-Bill Rate (%)

10000 14.00

9000
12.00
8000

7000 10.00

6000
8.00

5000

6.00
4000

3000 4.00

2000
2.00
1000

0 -
Jan-10

Oct-10
Jan-11

Oct-11
Jan-12

Oct-12
Jan-13

Oct-13
Jan-14

Oct-14
Jan-15

Oct-15
Jan-16

Oct-16
Jan-17

Oct-17
Jan-18

Oct-18
Jan-19

Oct-19
Jan-20

Oct-20
Jan-21

Oct-21
Jan-22

Oct-22
Jan-23
Apr-10
Jul-10

Apr-11
Jul-11

Apr-12
Jul-12

Apr-13
Jul-13

Apr-14
Jul-14

Apr-15
Jul-15

Apr-16
Jul-16

Apr-17
Jul-17

Apr-18
Jul-18

Apr-19
Jul-19

Apr-20
Jul-20

Apr-21
Jul-21

Apr-22
Jul-22

Apr-23
DSEX 364 T-Bill (Rhs)

Research Source: Bangladesh Bank, Dhaka stock exchange

 Equities 52

Investment themes to consider under the MPS scenarios in 2023E

Scenario Key theme Investment theme Top Picks

Companies with higher pricing power will enjoy a higher margin expansion on a
downward commodity cycle; Globally commodity prices have reverted toward the pre-Russia- OLYMPIC, BATASHOE,
Aggressive Margin Expansion Ukraine war level in a downward commodity cycle, and listed companies that have significantly BERGERPBL
raised their product prices are likely to book higher margin expansion

Companies with high cash balances will benefit from a rise in interest rates: Banks with
higher CASA and companies with high cash balances benefit from upward interest rates and BRACBANK, DUTCHBANGL,
Aggressive Interest Income revision of rate caps. MPETROLEUM, PADMAOIL

Companies with dollarized revenue are likely to be the main beneficiaries of further
Listed export-oriented
Currency Taka depreciation: Companies that have dollar-linked revenue, high-value addition and high
Progressive operating leverage due to low variable costs are likely to enjoy higher profitability driven by apparel companies, BSC,
depreciation UNIQUEHRL
Taka deprecation.

Companies with leading market shares and strong balance sheets will consolidate their
Aggressive SQURPHARMA, OLYMPIC,
Market Share market share: We believe market leaders with dollarized earnings sources or strong balance
+ sheets will consolidate their market share as smaller companies struggle under restrictive BATBC, BERGERPBL,
Consolidation BATASHOE
Progressive import and tight macroeconomic scenarios.

Companies with real estate exposure or major CAPEX completion will benefit in the high
Aggressive inflationary scenario: Global commodity price hikes and taka depreciation has led to higher
GP, MARICO, BXPHARMA,
+ CAPEX Cycle construction and materials costs increasing the replacement cost of existing assets.
WALTONHIL
Progressive

Research
 Equities 53
Aggressive

Margin expansion: Globally commodity prices are decreasing to the pre-war level,
companies that have significantly raised their product prices will see higher margin expansion.

Dow jones Commodity Index Change in the retail price of products

Change in retail
Company ticker Popular products
price since 2022

MARICO Parachute Coconut oil 37%

RECKITTBEN Harpic 36%

OLYMPIC Energy plus biscuits 30%

BERGERPBL Radiance Paints 26%

BATASHOE Power shoes 20%

SINGERBD Singer Fridge 15%

Research Source: Investing.com, Company websites, CAL research estimates

 Equities 54
Aggressive

Companies with higher pricing power will see faster margin expansion in a downward
commodity cycle due to higher customer retention.
Comparison Between Change in Price and Change in Volume of Sales (%)

Note: Due to the reporting standard of listed companies, we have only taken a handful of companies that report the amount of sales volume or change in sales volume. However, the theme extends
to all the companies that have increased their product prices and have retained sales volume, for example, the pharmaceuticals sector.

Research Source: Respective company’s financial statements, CAL research estimates

 Equities 55
Aggressive

Interest income: Banks with higher CASA and companies with high cash balances will
benefit from upward interest rates and revision of rate caps
Banks with Higher CASA Deposits Companies with High Cash & Cash Equivalent Holdings (BDT Mn)

80% 10.00% 60,000 50%

75%
9.00% 45%
70%
50,000
8.00% 40%
60%
7.00% 35%
53% 40,000
50% 47% 30%
6.00%

39% 38% 30,000 25%

40% 5.00%

20%
4.00%
30% 20,000
15%
3.00%
20% 10%
2.00% 10,000

10% 5%
1.00%
- 0%
0% 0.00%

OLYMPIC
MPETROLEUM
PADMAOIL

JAMUNAOIL
SQURPHARMA
DUTCHBANGL

PRIMEBANK

UCB

EBL
BRACBANK

CASA (%) NPL (Rhs)

Cash and Cash Equivalents Cash as % of total asset (Rhs)

Research Source: Company annual report

 Equity 56
Progressive

Dollar Bets: Companies with dollarized revenue and high operating leverage are likely to
be the main beneficiaries of further taka depreciation
Companies that have dollar-linked revenue, high-value addition, and high operating leverage due to low variable costs are likely to enjoy higher profitability driven by taka
deprecation.
Currency deprecation (%) Value addition vs operating leverage of selected sectors

15.0% 16.0x

Under
progressive 14.0x
scenario
Shipping
Company
12.0x

9.0%
10.0x
7.4%
Textile-Spinning
Under 7% 8.0x
aggressive
scenario
Synthetic Shoe exporter
6.0x

1.6% 4.0x Container Handler

0.6%
0.2%
2.0x
4Q2021 1Q2022 2Q2022 3Q2022 4Q2022 2023E

*For 2023E, Full year currency depreciation has been taken in account from Jan-Dec
0.0x
0% 10% 20% 30% 40% 50% 60%

Source: Bangladesh Bank, Respective company’s annual and quarterly reports, CAL Research estimates
Research
 Equities 57
Aggressive + Progressive

Market Share Consolidation: Companies with leading market share and strong balance sheets
will consolidate market share against the backdrop of the tightened economic scenario
We believe market leaders with dollarized earnings sources or strong balance sheets will consolidate their market share as smaller companies will continue to struggle under restrictive
import and tight macroeconomic scenarios. Square Pharma serves as a prime example of market share consolidation by major market players. Historically, in the five instances of the
tightened economic situation, Square Pharmaceutical’s revenue grew significantly compared to the industry.

35%

29%
30%

25%
22%
20% 23%

20% 14%
15%

10%
10% 11%
5%
5%
0%
-1% -4%
-5%

-10%
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022
Revenue growth of Square Pharma Pharmaceutical industry growth Currency depreciation

Research Source: Company annual report

 Equities 58
Aggressive + Progressive

CAPEX Cycle: Companies with major CAPEX completion will benefit from rising construction
costs.
Taka depreciation and import restrictions have led to higher construction and materials costs increasing the replacement cost of existing assets. As a result, companies that have
already completed their Capex investment will have a higher margin compared to the companies that will make a new investment.
Capacity Expansion (%) 5-year Capital Expenditure as % of Total Assets

29.5%
50%

20.4% 21%
19%
17.4%

12%
31% 31%
9.3% 8.7% 29%
26%
23%
1.16%
SQURPHARMA
GP

WALTON
MARICO
OLYMPIC

BATBC

BXPHARMA
ROBI
BERGERPBL

Consumer Segments Telco Pharmaceuticals Engineering

BPML ACMELAB BATBC RENATA BXPHARMA UNIQUEHRL

Research Source: Company annual report

 59

What Does This Mean

for Fixed Income Investments?
Preferring short-term maturities for fixed-income securities
 60
Fixed Income Aggressive

Exposure to fixed-income securities with shorter maturities will provide the opportunity to
reprice as the interest rate rises.
The spread between 364-days T-Bill and 5-Years T-bond has narrowed to 85bps, indicating shorter tenure T-Bills are providing better yields compared to longer tenure bonds. As the
central bank opts for a flexible interest regime, staying in shorter tenure T-bills will provide a better opportunity to reprice once T-bond rates start to increase significantly.
Yield Curve (%) Inflation (%) vs 1-Year T-bill Rate (%)

14.00
10.00 85 Bps
difference
8.75
9.00 12.00
7.9
8.00
10.00
7.00

8.00
6.00 6.41

5.00 6.00

4.00
4.00
3.00 3.44 297 Bps
difference
2.00 2.00

1.00
0.00

Jul-08

Jul-10

Jul-12

Jul-14

Jul-16

Jul-18

Jul-20

Jul-22
Mar-09

Mar-11

Mar-13

Mar-15

Mar-17

Mar-19

Mar-21

Mar-23
Nov-09

Nov-11

Nov-13

Nov-15

Nov-17

Nov-19

Nov-21
-
91-Day 182-Day 364-Day 2-Year 5-Years 10-Year 15-Year 20-Year

28-Dec-21 28-Dec-22 5-Jun-23 364 Day T-Bill Rate (%) Headline Inflation (%)

Research Source: Bangladesh Bank

 61

What Does This Mean

for Real Estate Investment?
An inflation hedge
 62
Real Estate

Higher construction and materials costs will increase the replacement cost of existing real
estate assets providing a hedge against inflation.
The cost of building materials has risen by 29% on average, owing to Taka deprecation Land prices in Dhaka have increased 27 (x) times over the last two decades.
and global commodity price hikes.

June 2022-June 2023

Cement
14.80% YoY

Land prices in Dhaka

city increased at a
Bricks
50% YoY
CAGR of 17%
in the Last 20 Years.

Steel/Rods
35% YoY

Research Source: Newspapers

 63

Disclaimer
This document has been prepared and issued on the basis of publicly available information, internally developed data and other sources, believed to be reliable.
CAL Securities Ltd. however does not warrant its completeness or accuracy. Opinions and estimates given constitute a judgement as of the date of the material
and are subject to change without notice. This report is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient
of this report must make their own independent decision regarding any securities, investments or financial instruments mentioned herein. Securities or financial
instruments mentioned may not be suitable to all investors. Investment in securities or financial instruments involves a degree of risk and investors should not
invest any funds unless they can afford to take the risk of losing their investment. Investors are advised to read the risk factors carefully before taking an
investment decision. For taking an investment decision, investors must rely on their own examination of the concerned issuer of securities or financial instruments
and the offer including the risks involved. CAL Securities Ltd. its directors, officers, consultants, employees, outsourced research providers associates or business
partner, will not be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses, outgoing or payments including attorney’s
fees which recipients of the reports suffers or incurs directly or indirectly arising out actions taken as a result of this report. This report is for the use of the
intended recipient only. Access, disclosure, copying, distribution or reliance on any of it by anyone else is prohibited and may be a criminal offence.

Research
Ahmed Omar Siddique, CFA Nicholas Dipta Gomes Ruhul Amin Raad
Head of Investment Strategy Senior Associate - Research Associate - Research
Tel: +8801709658760 Email: nicholasg@calbd.com.bd Email: ruhula@calbd.com.bd
Email: omars@calbd.com.bd

Stock Brokerage & Investment Banking

Rajesh Saha Zobayer Mohsin Kabir S.M. Arafat Hossain
Chief Executive Officer Chief Operating Officer Head of Investment Banking
CAL Securities Limited CAL Securities Limited CAL Investments Limited
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Research