Capital market struggling for vibrancy

The capital market of Bangladesh is small, weak and largely immature.  Despite being a pillar of the overall financial market, it is continuously struggling to become an effective and vibrant market for financial intermediation. Money market, the other pillar of financial market is comparatively more active.

Moreover, it is the equity or stock market which is always in focus while debt or bond market is generally ignored. A lack of awareness is also there on the inter-relation of equity and debt markets, the two main components of capital market.

Theoretically, stock market is instrumental in providing funds for different economic activities in the form of capital, whereas bond market provides competitive debt facilities for investable funds. Functioning of these two markets turns the capital market vibrant.

Stock market in the country consists of two full-fledged automated and demutualised stock exchanges -- Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). Bangladesh Securities and Exchange Commission (BSEC) serves as the watchdog and regulator of the bourses. Bangladesh Bank, as the central bank, plays a crucial role in keeping the equity market functional. Other market players are also there.

Following the boom and burst episodes in 2011, equity market saw a number of reforms and those helped to maintain a modest movement most of the time.  Nevertheless, country's equity market is still not well-managed. Speculation and manipulation predominate the secondary segment of the market.     

There is a very weak link between equity market and overall economic growth. Over the years, country's Gross Domestic Product (GDP) has been registering a consistent upward growth. The contribution of equity market to the growth is negligible. Or to put it in another way, economic activities mostly bypass the capital market as other formal and informal avenues of financing are available. The ratio of market capitalisation to GDP partially reflects this. DSE market cap-GDP ratio stood at 17 per cent at the end of November this year which was 20.5 per cent at the end of December last year.

It, however, doesn't mean that equity market's contribution to GDP declined within a year.   Despite being a popular indicator, the ratio changes almost every trading day as the market cap changes. So it is difficult to draw any conclusion from the ratio, especially on over-valuation or under-valuation of the market.  Popularised by Warren Buffet, the ratio measures total value of all publicly traded stocks in a market divided by that economy's GDP. The ratio thus compares the value of all stocks at an aggregate level to the value of the country's total output.

The DSE is the prime bourse of the country and more than 90 per cent of the total secondary market transactions takes place here. That's why, indicators of the DSE are considered as the representative of Bangladesh stock market.

Turnover is a good indicator of the size and depth of the market.  In the past year, average daily turnover in DSE was Tk 8.72 billion while it came down to Tk 5.83 billion in November this year. In the first 11 months (January-November), total turnover stood at Tk 1.25 trillion against Tk 2.08 trillion in the same period of past year. Thus annual turnover declined by around 40 per cent in the current year.

A major reason for the big drop in turnover is political tension due to the upcoming 11th parliamentary election. Annual review report of the Asia Frontier Fund (AFC) said: "The overall stock market of Bangladesh has remained weak this year due to nervousness in the run up to the national elections." 

DSE Broad Index (DSEX) showed a declining trend over the year with a regular fluctuation. The DSEX was 6039.78 points at the end of January this year which came down to 5281.25 points at the end of November.

While secondary market activities were dull in the outgoing year, primary market activities showed a better trend. Fresh fund rising through Initial Public Offering (IPO) increased around 223 per cent in 2018. It demonstrates that capital market is a good source of financing industrial activities. But when compared with bank financing, the ratio appears very small. For instance, only nine companies accrued new equity worth Tk 0.4 billion from the primary market in FY17 while different industries borrowed Tk 274 billion from different banks in the same year.

BOND MARKET: Absence of an active bond market is a big limitation for the country's capital market and also for the equity market. Bond market acts as a counterweight to equity market.  Though all the elements of a bond market are present in the country, full-fledged market structure and dynamics are absent.

In fact, country's bond market is dominated by government bonds but secondary trading of government bonds are limited due to lack of adequate policy measures.

In Bangladesh, investors still lack a clear understating of the operation of bond market. Higher yield rates offered by the government's non-tradable debt instruments, the savings certificates to be precise, is a major barrier to attract investors in other tradable securities like treasury bonds. Some 221 government bonds are now listed with the DSE and the value of issued capital against these bonds is Tk 548.59 billion. But not a single bond has been traded in the secondary stock market so far. Again, only one corporate bond is listed with DSE.

Moreover, businesses find transactions in the secondary bond market time-consuming, expensive and cumbersome due to lack of adequate market structure. They consider borrowing from the commercial banks and financial institutions convenient.

A vibrant bond or debt market can ease pressure on bank loans and reduce the risk of non-performing loans. Investors can borrow from the market with a competitive rate and reduce their cost of doing business. The government can also finance a large portion of budget deficit at a lower cost from bond market.  The bonds can also be listed with stock exchanges.

To bring vibrancy in the capital market, it is now time to put focus on both equity and debt market and their inter-links adequately. Overemphasis on stock market will neither make the market mature nor enhance the depth of the financial market.

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