The Rise and Fall of One of the World's Worst-Performing Stock Markets
By Neel Chowdhury
Nobody in Hafizur Rahman's family asked too many questions when the
money they sent home to Bangladesh doubled or even tripled within two
to three months. "He was like a prince," says Mirza Golam Sabur of his
brother-in-law. So when Sabur was told last May that his 55-year-old
brother-in-law died suddenly of a heart attack, he was shocked.
Shocking, too, was the discovery that the tens of thousands of dollars
sent to Rahman by relatives in Europe and North America was largely
gone. The funds that they planned to use to buy retirement homes for
relatives in the southern port city of Khulna had disappeared in
Bangladesh's volatile stock market.
Woeful tales like the Rahmans' are multiplying across Bangladesh as
the country's benchmark stock index, which has dropped 55% since early
2011, continues to fall. Although Bangladesh has seen booms and busts
before during its stock exchange's 58-year history, the steep losses
suffered over the past 12 months by millions of small investors
threaten to bring fresh economic and political turmoil to a
long-suffering nation that seemed, at last, to be gaining ground.
(Watch TIME's video "Fleeing Catastrophe, Stuck in the Slums of
Bangladesh.")
Between 2006 and '11 Bangladesh's booming garment industry fueled
average economic growth of 6.3%. In 2005, Goldman Sachs included
Bangladesh among the "Next 11" rapidly emerging economies to succeed
Brazil, Russia, India and China. J.P. Morgan followed suit in 2007,
including Bangladesh in its "Frontier Five" markets. Today, though,
the market's dramatic rise — and swift fall — seems like a cautionary
tale for emerging-market investors oblivious to the perils of hasty
banking deregulation and rapid capital inflows.
So what went wrong? The country's growth spurt was fueled by the
garment industry, where some 2.5 million workers toiled for about $40
a month, a third of wages in southern China. Low costs helped
Bangladesh become a hub for global apparel makers, including H&M and
Li & Fung. In 1993, the value of Bangladesh's garment exports was
under $2 billion, according to Stockholm-based Brummer & Partners, a
large private-equity-and-hedge-fund company that invests in
Bangladesh. By 2011, garment exports had risen sixfold to $17.9
billion.
Polo shirts and blue jeans were paired with another fast-growing
export from Bangladesh: Bangladeshis. Some 5 million Bangladeshis work
abroad, many as construction workers, mariners and restaurant owners
in Southeast Asia, the Middle East and Great Britain, and the $12
billion they sent home last year swelled Bangladesh's $100 billion
economy with cash. Coupled with the earnings from garment exports,
that cash flooded into more than three dozen banks across the country,
many of which were newly licensed, small and unprofessionally managed.
As inflation crept up and more banks entered the marketplace, the
pressure to generate higher returns for depositors mounted. That, in
turn, turned banks into stock-market players. The central bank allowed
banks to invest a tenth of their total liabilities in the market.
"This was considerably less restrictive than the international norm,"
says Ifty Islam, managing partner at Dhaka-based investment firm AT
Capital. (Read "Strike Divides Dhaka as Unrest Deepens.")
As banks poured money into stocks, the market rocketed skyward. In
2010, the benchmark index of the Dhaka Stock Exchange climbed over
90%. Such heady gains fed a hunger for investing among small-time
players, even among those who knew little about the stocks they were
trading. According to AT Capital's Islam, retail brokerage accounts in
Bangladesh jumped sevenfold from roughly half a million in 2007 to 3.5
million by 2010. "Many people didn't have any investment knowledge,"
says Sabur. "But the market was so bullish everyone was buying."
Unsurprisingly, the bubble soon burst. By the end of 2010, inflation
had climbed past 11%, pushing up the price of staples. Alarmed, the
central bank began tightening, in part by proposing stricter limits on
banks investing in the market. That became the trigger of a punishing
one-year-old market decline that's wiped out all the gains of 2010 and
is now threatening to widen into a more serious economic and political
crisis. As Europe's demand for garments slows and fewer Bangladeshis
find work abroad, the country has begun to run a current account
deficit. That is eroding the value of the Bangladeshi taka, which has
dropped by roughly a fifth against the dollar over the past two years
and is accelerating the market's slide. "It's going to get worse
before it gets better," predicts Arjuna Mahendran, the Singapore-based
head of investment strategy for HSBC Private Bank.
Worryingly, high food prices are stoking public anger against the
government Sheikh Hasina. Over the past year, groups of disgruntled
investors have been regularly gathering outside the stock exchange's
Dhaka headquarters to burn tires and protest, venting their
frustration with a regime they feel has not taken adequate steps to
curb market speculation and protect small investors. Last April, a
committee led by Khondkar Ibrahim Khaled, a respected former banker,
submitted an official report to the government that alleged extensive
market manipulation prior to the initial Jan. 2011 crash, ratcheting
up tensions ahead of a general election to be called by mid-2013.
(Read "Behind Bangladesh's Failed Coup Plot: A History of Violence.")
Decades of steady economic progress won't be necessarily unraveled by
a market rout alone. Kiron Bose, chief investment officer of Brummer &
Partners' Bangladesh-focused private equity fund, emphasizes that the
stock market has not traditionally been a major source of capital for
Bangladesh. Analysts say the country's larger banks are solvent enough
to continue lending to companies and individuals, albeit at
double-digit interest rates. "I still believe in the country's
long-term story," echoes AT Capital's Islam, who points out, for
example, to a report by the consulting firm McKinsey that says if
Bangladesh can upgrade its road and ports and Chinese manufacturing
rages continue to rise, the country's garment exports could further
double to surpass $40 billion over the next decade. Even so, to small
investors like Sabur's late brother-in-law, hitching his fortunes to a
roller-coaster market was a devastating ordeal.
http://www.time.com/time/world/article/0,8599,2105845,00.html?xid=gonewsedit
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