Funding government's infrastructure development

The country's economy demands an efficient bond market

Nironjan Roy | Published: September 06, 2019 21:06:25 | Updated: September 14, 2019 22:08:20

Bangladesh Securities and Exchange Commission (BSEC) has recently sought tax incentives for development of the country's bond market. The stock market regulatory body, according to media reports, has made a few suggestions in this regard to the National Board of Revenue (NBR).

The BSEC has long been thinking about a bond market. At the beginning of this decade, it floated international tender for appointing consultants for the purpose (this scribe was one of the members of the committee to evaluate the tender). An institutional bond market has, however, remained elusive until now.

An efficient bond market is considered an integral part of the overall financial market, which consists of equity market and debt market. Equity market is represented by stock exchanges while debt market is comprised of the bond market.

Each market has two separate segments: one is primary market and the other secondary market. Primary market provides arrangement or facility for mobilising fund through initial offering of the securities i.e., stock or bond while secondary market provides liquidating opportunity to investors.

In general, stock exchange and bond market are categorised as secondary market. Although there is no direct correlation between the two market segments, both units sometimes complement each other because mobilisation of fund, if not possible from equity market, can easily be done from the bond market.

BANGLADESH'S FINANCIAL MARKET: In our country, equity market has existence in primary and secondary components but the bond market has presence in the primary market alone. Because of the presence of both primary and secondary equity markets, this segment of our financial market has been rapidly growing and has taken a sizable shape.

Although the market has seen ups and downs -- a usual character of capital market -- the number of listings, daily turnover in terms of value and volume and above all, market capitalisation have reached the level of any standard equity market.

However, compared to our equity market, the debt market has not grown at all. It rather remains at a rudimentary stage due to nonexistence of secondary bond market.

So, establishment of a secondary platform of debt market will ensure a complete cycle of financial market and as such will take the country's financial industry to a standardised level.

ADVANTAGES OF BOND MARKET: Efficient bond market has higher advantages over the equity market as it facilitates the scope of short, medium and long-term financial opportunities without compromising ownership structure. This market even creates a competitive environment in the borrowing from banks and from institutional debt market.

Interest rate on loan and debenture becomes more vibrant and competitive. So, no regulatory or government intervention is required. Market rate is manoeuvred by determination of benchmark rate (bank rate) fixed by the country's central bank.

In our country, there is an allegation of flat high lending rate charged by the banks; something that can be easily avoided, if there is a bond market. When banks raise lending rate, borrowers with good standing will have an alternative opportunity to issue bond at relatively cheaper rate to mobilise fund that can be used to repay the bank borrowing.

Similarly, if interest rate and yield rise in the bond market, the business community may opt to borrow from banks. Even banks may not have to rely solely on depositors' money for their loanable fund; rather they may have an option to issue long-term bond to mobilise fund for their long-term lending.

Especially for project financing and mortgage financing, mobilisation of fund from bond market is preferable and more stable than depositors' money. The country's savers will have an alternative source of investment and will not have to depend on bank savings only.

Furthermore, a bond market offers pension fund and provident fund of both government employees and private sector companies a very suitable and attractive opportunity to make investment.

Many private companies with good standing refrain from mobilising fund from equity market for two specific reasons -- regulatory requirements and sharing of ownership. In that context, bond market can play an important role in meeting financial needs of such companies. Bond market regulations are less stringent and unlike equity market, they cease to exist once debt is paid off.

BOND MARKET, SOURCE OF GOVERNMENT FUND: An efficient bond market is considered the main source of mobilising fund by the government for its infrastructure development. The government in our country depends on institutional borrowing either from within the country or from international sources -- a process which is not only time-consuming but also troublesome.

The Bangladesh economy is growing at more than 7.0 per cent rate for about one decade and this growth may be accelerated through implementation of some mega projects currently being implemented. And for sustaining this growth, the government needs to undertake more infrastructure projects that would require enormous amount of long-term financing. Such funds can easily be raised if the country establishes a sound bond market.

Bond and debt instruments issued by the government and government agencies are categorised as sovereign bonds, which carries high demand not only from domestic investors but also from overseas investors.

BOND MARKET MAY ATTRACT FOREIGN FUND: The global economy has been passing through stagflation for the past one decade resulting in abundance of cheap money. There is few good investment opportunity. Interest rate remains historic low in all developed countries. Japan and some European countries have been pursuing even negative interest rate policy. As a result, yield in bond market has remained very low - and negative in many countries.

Currently, there are about $13 trillion worth of bonds bearing negative yield. That means, investors who hold these instruments till maturity will receive less than what they have paid while acquiring these assets.

In such circumstances, investors have been desperate to find alternative investment opportunities that can fetch some revenue for them. Thus, they do not hesitate in acquiring risky assets and even looking for emerging markets.

So, prolonged slow growth or weak growth or even no growth in the developed world has created an ample opportunity for emerging markets. Bangladesh will immensely benefit from global funds should the government take appropriate measures that include establishment of a secondary bond market

However, we have to keep in mind that foreign fund acts like flying capital. It is very good when an economy booms and very bad when that economy faces recession. During the boom, foreign fund provides easy and cheap money, whereas sudden withdrawal by foreign investors during recession aggravates the situation.

Therefore, some restrictive measures and additional controls are always required while dealing with foreign funds.

The BSEC and the Ministry of Finance in particular should seriously go ahead with the move to establish a secondary bond market. This is now demand of the country's economy.

The BSEC's approach to NBR seeking special incentives for bond market is a good initiative but such incentives may work only if a secondary bond market exists. Otherwise, a select group of people, not all, may benefit from it.

Appropriate rules and regulations should be put in place and infrastructures and facilities created prior to launching of any product and services, so the market runs in a systematic way from the very beginning.

Contrarily, in our case, because of strong demand in society, products and services are marketed before rules and regulations are introduced. Consequently, an unregulated situation prevails and it becomes difficult to streamline the market as we witnessed in the cases of cell phone marketing, mutual fund operation and private universities.

Debt instrument has already started to get into the market one after another, so formal debt market comprising both primary and secondary segments should be established before the situation goes beyond control.

Nironjan Roy is a banker based in Toronto, Canada.


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