Money Market Scenario and

Outlook

(This document has been prepared by the Research Team of EBL Securities Limited for information only for its clients.
No part of this report should be copied or used in any other report or publication or anything of that sort without
any prior permission taken from the authorized publisher of this report)
 Money Market Scenario and Outlook
Money market of Bangladesh has gone through some swift changes due to the backlash on the liquidity. Liquidity
drag has been mainly occurred due to the extensive private sector credit growth keeping most of the banks’ advance
deposit ratio (ADR) close to 85%. At least 12 commercial banks including the public banks have exceeded the existing
ADR limit. Private sector credit growth was mainly fuelled by borrowers’ appetite for cheap fund and banks’
opportunity to generate profit. As a drive to squeeze the excessive private sector credit growth, Bangladesh Bank
plans to curtail limit on advance-deposit ratio which will persuade banks to seek large deposits in short time. To
pursue the objective, deposit rate needs to be attractive for all sorts of potential depositors. The impact is already
apparent in the interest rates of banks. According to the industry participants, interest rate has already gone up by
around 1% from October, 2017. Upward pressure on USD has also led to a critical scenario for retaining strong
liquidity of BDT. Import of consumer goods has surged to a massive level due to shortage of food supply.
Furthermore, import of capital machineries has also gone up as construction of large development projects are on
the pipeline. Unless strong interference is initiated by Government, USD may escalate further and lead to squeezed
liquidity. Interest rate is supposed to go up further in 2018.

Extensive Private Sector Credit Growth and Upward Pressure on Inflation

Even though Bangladesh Bank had set up the private sector credit
growth target at 16.2% for the first half of the fiscal year 2017-18, it Cheap fund lured large borrowers
remained well above the target from July, 2017. Aggressive lending by
the bank was triggered by the increasing demand for credit to avail
cheap fund. Weighted average lending rate has stood at 9.39% by
October, 2017. This is the lowest in the last 10 years. Deposit rate faced Private sector credit growth stood
the same fate correspondingly standing at 4.89%. Hence, cheap fund at 19.1% by the end of November,
was availed by major borrowers to take the most out of low interest 2017
rate regime. It resulted in massive private sector credit growth.
Scenario has changed since then. From November, 2017 interest rate
has gone up and it is expected to continue the ascent further. Inflation spiked as price of food
items soared due to shortage of
Inflation has also shown escalation due to shortage of food supply in food supply
the country after flood damaged the harvesting areas. Food inflation
stood at 7.13% in December, 2017.

Private Sector Credit Growth, Jan-Dec 2017 Inflation, Jan-Dec 2017

6.2 0% 6.12%
19.06%
19. 50%

19. 00% 5.91%

6.0 0% 6.04%
18. 50%

17.80%
5.76%
18.63% 5.83%
5.94% 5.57%
5.8 0%

5.89%
18. 00%

17. 50%
16.94%
17.84% 5.6 0%

17. 00%

5.39%
16.06% 5.47%
16. 50% 5.4 0%

16.03%
16. 00%

15.61% 16.21% 5.15% 5.31%

5.2 0%

15.66%
15. 50%

15.88%
15. 00% 5.0 0%

Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17

Source: Bangladesh Bank Source: Bangladesh Bank

1 Disclaimer of EBLSL and the Analysts is located at the end of this report. 11 January 2018
Shrinking of Excess Liquidity

Excess liquidity kept shrinking throughout Liquidity Position of Banking Industry, BDT bn
2017. The difference between total liquid
1,200
asset and minimum required liquid asset has
1,150
narrowed down gradually due to boost in
1,100
private sector credit growth. By the end of
2017, majority of the banks are facing 1,050

shortage of available liquid funds. Extensive 1,000

growth in import payment, appreciation of 950

USD, and alternate saving instrument like 900

national saving certificates which yield higher 850
rate than bank offers will create further 800
Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17
liquidity squeeze. Whereas excess liquidity
stood at BDT 1,098 billion in January, 2017, it Excess Liquidity Linear (Excess Liquidity)
Source: Bangladesh Bank
fell down to BDT 922 billion in September,
2017.

Proposed Revised Limit on Advance-Deposit Ratio

The aggressive lending is supposed to be subdued by Bangladesh Bank by

tightening the money supply in the market. With this effect, Bangladesh
Bank plans to cut the limit of advance-deposit ratio (ADR) to mitigate the Current ADR stands at 85.0%
possible liquidity pressure on the market. for conventional banks and
90.0% for sharia-based
The ADR of all banks is likely to be resettle at 80.50% for the conventional Islamic banks
banks and at 88.00% for sharia-based Islamic banks. Currently the ratios Action: Planned ADR are
80.5% and 88.0% respectively
are 85.00% and 90.00% respectively. If the ratio is re-fixed in the next
Impact: Deposit rate will
monetary policy statement, second half of 207-18, banks will be induced have upward pressure
to offer attractive rate for their depositors. Hence, interest rate will have
upward pressure.

Spike in Call Money Rate and Term Loan Due to Liquidity Shortage

Furthermore, call money rate has seen an

Call Money Rate, %
upsurge in recent times which is a representation
of both year-end pressure and liquidity shortage 3.93 3.91 3.87 3.92
3.81 3.82
3.76 3.77
in the banking industry. Call money rate went to 3.9

3.66
3.72
Source: Bangladesh Bank
as high as 4.07% at the end of December, 2017.
3.7 5

3.54 3.5
3.6

Liquidity shortage is apparent in the banking 3.4 5

industry. Rate for term placement has also gone 3.3

up by around 1%-1.5% in recent times creating

hike in banks’ and NBFI’s cost of funding.
Source: Bangladesh Bank

Alternative Channel of Finance: Costly Option

Libor rate has also remained upward in the last 1 year. Libor rate currently stands at around 1.85%. So,
availing foreign loan has also become less lucrative considering spread and exchange rate volatility risk.
Exchange rate volatility risk has shot up due to recent spike in the USD to BDT rate. So, availing loan from
both local and foreign market is becoming costlier.

2 Disclaimer of EBLSL and the Analysts is located at the end of this report. 11 January 2018
 6 Months Libor Rate, %
Liquidity shortage drove the
1.9
1.84 call money rate up
1.8

1.67 Libor rate has remained

1.7

upward in last 1 year and is

1.58
1.6
expected to sustain the trend
1.51
1.45 1.46 1.45
1.5

1.42 1.43 1.42 Alternative channel for

1.38
1.4
1.35 funding has also become
costly
1.3

Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

Source: macrotrends.net

Exchange Rate Volatility

Issues like increased import, lower export, declined remittance has pushed up the price of USD in the recent period.
The demand for USD will be further intensified as it is apparent in extensive jump in the opening of LC (Letter of
Credit). In the first five months of FY 2017-18 opening of LC amounted to USD 5.75 billion, increase of twofold
compared to the same period of previous year. Opening of LC for import of food items has gone up 4 times compared
to the same period of previous year. Food grains hold 5%-6% of total import payment. Major import items are textile
and articles thereof (10.3%), capital machinery (7.6%), iron, steel, other basemetals (7.0%), Fuel oil (5.7%).

USD to BDT
83.35
82.80
83

82.10
81.80 83.15
82 81.35
82.10
Capital
Rice and Wheat Fuel Oil
81

80.15 81.35
81.85 Machineries
80.65
79.05 257% 33%
80

79
79.90 39%
78

Figure: Increase in Opening of LC YoY (item wise) in the July-November, 2017 period
Source: Bangladesh Bank *Jan-18: as on 11 January 2018 Source: Bangladesh Bank

Import of capital machineries are also on the uptrend and is likely to Reasons for continuous hike of
increase further. Large development projects like Padma Bridge, Metro USD:
Rail, Padma Rail Link, Matarbari Coal-fired power plant, Rooppur Neuclear  Increased import of consumer
plant are either in construction process or on the pipeline to commence goods
construction. Apart from that, Government has undertaken plan to provide  Increase in capital machineries
electricity in massive level. With that objective, Government has approved import as construction of large
large number of power plants and is likely to approve more in the year development projects
2018. Hence, import of capital machineries will experience further ascent. (including large number of
power plants) are on the
It has been observed that apart from increase in the quantity of imported pipeline
goods, upsurge in the price of imported goods were evident. Hence, Over-  Slow growth in export
invoicing is another probable concern that is being used for remitting  Downfall in remittance
money to foreign destination prior to the election.  Possible remit of fund through
over-invoicing

3 Disclaimer of EBLSL and the Analysts is located at the end of this report. 11 January 2018
Recently oil price has experienced upsurge as supply has Oil Price (Brent Crude Oil) USD per barrel
been kept tight. Following the increase in oil price, most 112.65 108.02 103.86
of the imported products’ cost has gone up as freight
120

90.66
100

cost has surged correspondingly. Such upward trend, if 80 57.94

38.73
continued, can make import more costly and will finally
60

102.8 98.63
52.32 56.12 54.9 69.48
40

hit inflation. In 2017 the lowest price was lowest USD 20

45.83 per barrel. As on January 11, 2018 oil price has

0

Dec, Dec, Dec, Dec, Dec, Dec, Dec, Dec, Dec, Dec, Dec, Jan,
gone up to USD 69.48 per barrel. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: http://www.macrotrends.net

Bleak Scenario in Foreign Currency Inflow 4

Export Earnings, USD billion
3.64
3.31 3.09
3.5

3.11 3.07 3.06 2.99 3.06

3 2.73 2.78 2.84
Even though import order has gone up by huge chunk, 2.5 2.03

export and remittance hasn’t experienced much 1.5

2

spike. The total export amount stood at USD 17.92 1

billion in the first half of 2017-18, an increase of

0.5

7.15% compared to the same period of previous year.

Source: Bangladesh Bank

Remittance has posted negative growth in the last six
months compared to the same period of previous Remittance, USD billion
year. The bleak scenario emerged due to fall in 1.40

1.27 1.22
1.09 1.18 1.17
1.08
remittance from gulf region resulting from massive 1.01
1.20

1.00
0.94 1.01 1.06
1.01 0.95
decline in the oil price. The plummet has continued 0.80

and curtailed the inflow of foreign currency in 0.60

Bangladesh. In the last 6 months remittance inflow

0.40

0.20

stood at USD 7.49 billion posting a decline of 0.66% -

YoY.
Source: Bangladesh Bank
Sales of USD by Bangladesh Bank

To relief the pressure on USD, Bangladesh Bank injected more than USD
1.11 billion into the market in FY 2017-18 so far resulting into buyback of Sales of USD by Bangladesh
local currency. The release of dollar happened in a very short period of Bank stood at USD 1.11 billion
time from December to first week of January. Even after increasing the in 2017-18 so far
availability of dollar in the market, it hasn’t been able to drag the USD to
BDT rate down as demand for dollar has reached manifold and Impact: Liquidity shortage of
outweighed the supply for dollar. The trend indicates that USD is BDT has been further
intensified doing little to
supposed to appreciate further in exchange to BDT unless Government
relieve the pressure on dollar
makes major interference.

Government Borrowing Scenario Govt. Domestic Net Borrowing, BDT billion (Jul-Oct,
2017)

The government borrows from two domestic sources: banking Other Securities (0.2)
system through Treasury Bills (T-Bills) & Bonds and the non- Govt. Deposit (9.9)
banking system mainly through National Savings Directorate Accrued Interest 10.9
Adv. to other Min, Auto and Semi-… 0.9
(NSD). Government’s net borrowing from banks is currently at Adv. to Food Ministry 0.0
negative sphere as on December, 2017. From July-December, NSD Instruments 173.1
2017 Government repaid BDT 39.8 billion to scheduled banks and Balances of GIIB Funds (0.5)
Special T-bonds (1.0)
BDT 38.9 billion to central bank. Government has adopted NSD
T-bonds 15.5
(National Savings Directorate) as the major source for borrowing T-bills(28.7)
even though the cost is way too high. Ways and Means Advance(30.2)
(7 0.0) (2 0.0) 30.0 80.0 130 .0 180 .0 230 .0

Source: Bangladesh Bank **Detailed data available for July-Oct 2017 Period

4 Disclaimer of EBLSL and the Analysts is located at the end of this report. 11 January 2018
The rate of interest on bank borrowing is at highest 8.34
percent, while that on savings instruments is 11.04-11.76  Government net borrowing from bank is
negative
percent. Government has borrowed BDT 211.7 billion from
 Borrowing from costly source, NSD has
July-November through net sales of savings certificates which
gone up extensively and is expected to
is 4.19% higher YoY. Since saving certificates offer high yield, soar since the rate is very lucrative
savers find it lucrative and flock into buying the high yield  Deposit rate and lending rate from banks
instruments. Hence, Government will have very few option to face upward pressure
shift its borrowing destination and Banks and NBFIs will face
adversity in attracting depositors.

Inclusion of Buy-back clause in the Policy of Bangladesh Bank Debt Department

Upon the recommendation from ADB (Asian Development Bank) for providing loan to Bangladesh in its Third Capital
Market Develop Program (Financed by the Technical Assistance Special Funds), the Government of Bangladesh was
advised to include short sale and buy back clause in its policy for treasury bills and treasury bonds. Since Bangladesh
bond market is underdeveloped, inclusion of short sale in the policy is not feasible. Hence, only the clause for buy-
back policy has been included. According to professionals from money market, the execution of buy-back is not
happening anytime soon, at least not in significant level since Government will require fund prior to the election.

Concluding Remarks

Controlling inflation and curbing private sector credit growth has become one of the top priorities for Bangladesh
Bank. Apart from curtailing the limit of advance-deposit ratio, Bangladesh Bank can take some other restrictive
measures to control the private sector credit growth in its Monetary Policy Statement for 2nd half of FY 2017-18.
Newly proposed advance-deposit ratio limit will adversely impact banking industry leading banks to increase its
deposit rate to attract large deposits in short period. Correspondingly lending rate may not increase at the same
speed causing banks to absorb negative impact on its earnings. On the other hand, USD to BDT exchange rate has
reached to a new height due to huge demand for dollar which has been reinforced by increase in import of consumer
goods, slow growth of export, and downfall of remittance, and upcoming election. Upon analysis and insight from
industry professionals in the money market, overall combined impact will lead interest rate to go up by around 1%-
2%. Hence, liquidity crisis will persist and will put negative impact on the capital market with squeezed market
turnover.

Interest Rate Movement % (Current and Forecasted)

16

13.77 13.45
12.4 12.8 12.46
14
12.14 12.14
11.51 11.34 11.18 11.39
12
9.93 9.39
8.26 8.39
7.64 7.64
10

7.09 7.46 7.25 7.14

8 6.29 6.08 6.34
5.22 4.89
6

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

Deposits Advances
Source: Bangladesh Bank and EBLSL Research

5 Disclaimer of EBLSL and the Analysts is located at the end of this report. 11 January 2018
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