Cablegate: Bangladesh Partially Insulated From Global Financial Crisis

VZCZCXRO5196
PP RUEHAST RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHKA #1070/01 2881232
ZNR UUUUU ZZH
P 141232Z OCT 08
FM AMEMBASSY DHAKA
TO RUEHC/SECSTATE WASHDC PRIORITY 7524
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLO/AMEMBASSY LONDON 1812

UNCLAS SECTION 01 OF 02 DHAKA 001070

SENSITIVE
SIPDIS

DEPT FOR SCA/PB, EEB/EPPD
TREASURY FOR YEE WONG

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV EAID EAGR PGOV BG
SUBJECT: BANGLADESH PARTIALLY INSULATED FROM GLOBAL FINANCIAL CRISIS
- FOR NOW

Summary
-------

1. (SBU) Despite a sharp drop in local stock markets on October 12,
Bangladesh's economy is relatively insulated -- for now -- from the
effects of the global financial crisis, according to local
economists and bankers. Should a global recession last for an
extended period, however, Bangladesh could see a slowdown in several
areas, including the key drivers of its economy, garment exports and
remittances.

Impact likely to be minor in the short term
----------------------------

2. (U) Until October 12, Bangladesh's financial markets remained
largely unaffected by the meltdown of the financial sector in the
United States, Europe and parts of Asia. Key stock indices fell by
one to two percent the week of October 5, more the result of a
change in loan ratios by some local banks than a response to the
global crisis. When markets opened on the 12th, however, the
benchmark Dhaka Stock Exchange index fell by 3 percent, the largest
one-day drop in four months. This decline appears to be a reaction
to last week's steep declines in major stock markets worldwide.
Stocks rebounded somewhat October 13; main indices gained about 1
percent.

3. (U) The head of the Dhaka Stock Exchange told the media on
October 13 there was no reason for panic among Bangladesh portfolio
investors, mainly because Bangladesh financial institutions were not
strongly integrated into world markets. Foreign portfolio
investment accounts for less than three percent of the total market
capitalization of the nation's stock markets. Also, capital
controls here restrict Bangladesh portfolio investment abroad.

4. (U) Similarly, Bangladesh's commercial banks, as well as its
central bank, have limited exposure to the crisis. One local
economist reported that the central bank, Bangladesh Bank, held its
foreign currency reserves in cash and U.S. Treasury bills. Local
commercial banks have an estimated $500 million in foreign currency
holdings, none of which is held in the highly speculative financial
instruments that have brought down some of the world's largest
investment banks. In addition, many commercial banks with funds in
overseas banks are moving these funds to Bangladesh Bank.

5. (U) According to local bankers and economists, the most
important thing Bangladesh must do in the short term is manage its
exchange rate in the wake of exchange rate fluctuations in key world
currencies and the currencies of Bangladesh's neighbors. And as
credit freezes worldwide, at least one economist expressed concern
that developing countries like Bangladesh might experience
constraints on trade finance, which keeps international trade --
including exports of products like garments - functioning smoothly.

Greater impact possible in the long term
----------------------------------------

6. (U) Should the financial crisis lead to a lengthy global
recession, Bangladesh's economy could be harmed more greatly,
according to local experts. They expressed concern about the impact
on Bangladesh's critical ready-made garment (RMG) industry, which
exported more than $10 billion in garments in fiscal year 2008,
mainly to the United States and Europe. As consumer spending in the
United States and Europe declines, RMG orders could fall; often
unreliable local media reported a decrease in orders by JCPenney and
the closure by The Gap, Ann Taylor, Lane Bryant and others of stores
in the United States. The media reports speculated these
developments could reduce the $3.2 billion in Bangladesh garment
exports to the United States.

7. (SBU) On the other hand, Bangladesh exports mostly medium- to
low-end apparel, towards which consumers could gravitate despite
reduced consumption or disposable income. One expatriate apparel
buyer told Econoff that many manufacturers had orders through
January 2009. After that, however, orders could decline.
Alternatively, the buyer said, large apparel outlets could place
more orders of smaller quantities throughout the apparel season as a
way of hedging against lower retail sales, rather than the usual
practice of one huge order at the beginning of a season.

Remittances
-----------

8. (U) Bangladesh's economy also relies heavily on remittances from
overseas workers, most of whom work in the Persian Gulf. In the
last fiscal year, overseas remittances to Bangladesh exceeded $8

DHAKA 00001070 002 OF 002

billion, and some experts have predicted remittances could reach $10
billion this fiscal year. Should falling oil prices lead to a
contraction in Persian Gulf economies, Bangladesh's remittances
could be hit.

Foreign Direct Investment
-------------------------

9. (U) Bangladesh, like other developing nations, could see reduced
levels of foreign direct investment (FDI) in the medium term. FDI
numbers in Bangladesh, $666 million in 2007, have remained low in
comparison to other Asian economies and have declined in the last
couple years. At a time when Bangladesh's energy and infrastructure
needs --areas that have attracted FDI here -- are greater than ever,
the current credit crunch bodes ill for Bangladesh's ability to
improve its FDI performance.

Foreign Assistance
------------------

10. (U) A few analysts have expressed concern that large bailouts
by the USG and European governments could result in a future
decline, at least temporarily, in those governments' ability to
provide foreign assistance to developing nations, including
Bangladesh. While foreign aid accounts for only 2 percent of
Bangladesh's GDP, international donors play a leading role in areas
critical to Bangladesh's long-term development, including
infrastructure, health, and education.

Government Reassurance
----------------------

11. (U) Top Government of Bangladesh (GOB) officials and the
Governor of Bangladesh Bank have made public statements to reassure
Bangladeshis about short and long term prospects for the nation's
economy. Bangladesh Bank has been transparent in identifying where
it and commercial banks hold the nation's foreign currency reserves,
i.e. in safe financial instruments like U.S. Treasury bills. GOB
and business leaders said they would monitor closely the impact of
the crisis on Bangladesh's RMG sector and would seek measures to
minimize threats to the sector. Bangladesh's leaders also are
working to identify potential effects of the crisis on the nation's
poor. (NOTE: More than 80 percent of Bangladeshis subsist on less
than two dollars a day. END NOTE.)

Comment
-------

12. (SBU) Another casualty of the financial crisis could be the
USG's ability to argue the merits of a market-based economy. In
Bangladesh, where underlying economic beliefs tend more toward a
managed economy than capitalism, the financial crisis is likely to
provide ammunition for those who support a greater government role
in the economy. Fortunately, Bangladesh's best known economist,
Nobel laureate Muhammed Yunus, said publicly over the weekend that
while government solutions were needed in the short run to address
the current crisis, in the long run market mechanisms continued to
be the best means of addressing economic challenges. In contrast,
an economist affiliated with one of Bangladesh's main political
parties last week pointed to the current crisis as a reason for the
nation's next government to remain actively involved in Bangladesh's
economy. As Bangladesh prepares for a transition back to democracy,
we will need to work even harder to convince many Bangladeshi
leaders that the key to economic growth here is less, not more,
government intervention in the markets.

Moriarty

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