Thoughts from a Renaissance man How vulnerable is the Bangladeshi taka?

Thoughts from a Renaissance man Economics & Strategy

21 June 2018

Four overvalued South Asian currencies in 2015 have now become two, putting growing pressure on Bangladesh. We expect depreciation of the Bangladeshi taka (BDT) to pick up from 4% and approach 10% annually.

One-fifth of South Asia’s textile exports have got much more competitive vs Bangladesh

First Sri Lanka, starting in 2015, and then Pakistan, in the past six months, have removed most of their overvaluation that we

identified in our real effective exchange eate (REER) model in recent years. Together they account for 20% of all South Asian

textile exports (vs 50% from Bangladesh), and after 15-20% currency deprecation between them, there is pressure on the BDT to

follow suit. The current 4% annualised deprecation in the BDT is probably not enough, especially given two additional factors.

First, a possible hike in the minimum wage before elections (expected in 4Q18) threatens further damage to Bangladesh’s regional

competitiveness. Second, we see a high risk that US profit repatriation from the EU to the US will strengthen the dollar significantly

against the euro. Given that 55.5% of Bangladesh’s exports went to the EU in FY2017, the BDT needs to be depreciating against

the euro, not appreciating by 5%, as it has done in the past two months.

When Bangladesh’s CA goes into deficit, FX depreciation picks up to 10% or more

Looking back over the past 20 years, we can see two periods where after years of only very modest depreciation (2002-2004, 2007-

2010, 2013-2016), BDT depreciation has accelerated to over 10% in a single year. Both the 2005-2006 and 2011 sell-offs appear

linked to the current account (CA) slipping into a small 0-1% of GDP deficit range in 2004 and 2011; we saw similar in 2017. One

IMF exchange rate model reckons that while a 5% of GDP CA deficit is normal, they adjust this for Bangladesh, arguing that -1% of

GDP in Bangladesh is “normal”, presumably because the currency has indeed adjusted when the deficit has reached this level.

We think a 10% annualised depreciation is more likely than a bigger 19% move as in 2011-2012

The question for investors is whether a sell-off over the coming year will peak at an 11% move as it did in 2005-2006, or does it

risk becoming more extreme? A 9% move in the year to November 2011 accelerated sharply in the subsequent two months and

peaked at 19% (before rallying back over the following year, to end up just 10% weaker than two years previously).

The argument in favour of the bigger move is that the BDT has never been as expensive in today’s money as it was in 2017. Also

the IMF forecasts the CA deficit will reach 2.0% of GDP in 2018 and 2.3% of GDP in 2019, with the latter figure being the biggest

deficit since 1990. However, we see a few significant differences from 2011. First, inflation is around 6% while back then it was

12%, driven higher by a poor harvest which sucked in imports too. Second, gross foreign exchange reserves are equivalent to

around eight months of import cover now, against just under three months in 2011. Third, key export markets such as Europe

looked in deep trouble in 2011, while in 2018 there is a modest recovery under way in Europe. This does not look like 2011.

EUR/$, minimum wage hikes, elections, oil and the INR are all variables to watch

We expect nominal BDT depreciation to be 10% over a 12-month period, which would still leave the BDT about 15-20%

overvalued in REER terms, implying more deprecation in subsequent years. The 4% pace of depreciation may only pick up after

4Q18 elections are out of the way. A stronger dollar and big wage hikes will demand more depreciation and earlier. Falling oil

prices might help slow the rate of required depreciation. The Indian rupee (INR) rate vs the dollar and local food production are two

other important variables.

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Renaissance Capital 21 June 2018

Thoughts from a Renaissance man

There is an excellent overview of the Bangladeshi economy and market outlook from Dan

Salter, All aboard published on 6 April 2016 – so there is no need to repeat his cool work

here. There is further good macro work from the IMF in its last Article IV from June 2017.

What we will add is this key table from Electric Power to the People, published on 30 April

2018. It shows in the first column that electricity consumption, at an average 305 kWh per

capita, scrapes over the 300 kWh threshold that allows industrialisation. However, adult

literacy at 61% is too low to allow manufacturing to rise above 20% of GDP on a

sustainable basis1, although as we pointed out last year, this conceals big regional

variations within the country (the more highly literate coastal areas probably do meet the

70% literacy threshold for industrialisation). Lastly, it shows that Bangladesh’s strong

growth record might well be explained by its excellent investment/GDP ratio, which at

31% is well above the 25% key threshold Dan Salter has written about previously.

In brief, when adult literacy reaches 70% – perhaps in 2024, assuming a 1-ppt

improvement each year – Bangladesh will be on the path to fast sustained growth and

much higher per-capita GDP, via industrialisation, high value added services or both.

Figure 1: Key electricity, literacy, investment and manufacturing metrics kWh per capita (2015)

Adult literacy (2015)

Investment to GDP

(2017)

Manufacturing, value added % of GDP,

(2016)

kWh per capita (2015)

Adult literacy (2015)

Investment to GDP

(2017)

Manufacturing, value added % of GDP,

(2016)

Armenia 1,842 100 21 10 Mozambique 498 59 44 10 Jordan 1,835 98 20 18 Zimbabwe 492 87 20 10 Egypt 1,644 76 15 17 Pakistan 465 56 16 13 Namibia 1,562 91 23 12 Papua New Guinea 425 63 na 2*** Tajikistan 1,532 100 21 11* Cambodia 321 78 22 17 Vietnam 1,465 95 27 16 Ghana 316 77 14 6 Tunisia 1,409 81 22 17 Bangladesh 305 61 31 18 Moldova 1,298 99 22 14 Angola 302 71 26 na Colombia 1,188 95 23 13 Sudan 274 59 13 na Iraq 1,180 80 na 2 Cameroon 253 75 26 13** Jamaica 1,030 88 20 9 Ivory Coast 245 43 21 14 Gabon 981 83 32 3** Senegal 217 56 26 14*** Morocco 868 72 34 18 Rep of Congo 180 79 24 8 India 789 72 32 17 Kenya 164 78 17 10 Indonesia 786 95 33 21 Nigeria 139 60 13 9 Zambia 711 85 42 8 Tanzania 92 80 28 6 Philippines 667 97 25 20 Ethiopia 82 49 39 4 Laos 636 80 na 9 Uganda 73 74 25 9 Sri Lanka 558 93 na 17 Rwanda 55 71 23 6 *2013. **2015. ***2014.

Source: EIA, IE, UN, IMF

Also worth adding are our thoughts on political risk in the country, given forthcoming

elections due in 4Q18. Based on 223 countries with Bangladesh’s income level and its

political system type of “open anocracy” (democracy, with elements of autocracy), we see

a 12% annual chance of a significant regime shift, including a 4.5% chance of a shift to

full Gulf/China-style autocracy, a 1.8% chance of a shift towards Egyptian-style closed

anocracy, a 0.9% chance of state failure (Somalia, Afghanistan – but we discount even

this 0.9% risk though) and a 4.9% chance of a shift to democracy. The base 88% chance

is no change in any given year, but the risks are slightly on the side of a shift towards

autocracy/failure. This matters because reduced foreign aid was a factor that undermined

the BDT in 2011 and foreign aid could be at risk if the political regime changed away from

the type that donors tend to favour.

1See Thoughts from a Renaissance Man: Literacy, development and industrialisation, 27 July 2017

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Renaissance Capital 21 June 2018

Thoughts from a Renaissance man

Figure 2: Percentage chance of these "open anocracies" seeing a regime shift at various per-capita GDP levels (constant 2011 PPP $)

To autocracy To closed anocracy

To democracy To full

democracy To occupation To failure

Data points

Key countries and their per-capita GDP ($ '000) in 2014

0 4.8% 2.4% 9.5% 0.0% 0.0% 1.2% 84 1,000 2.6% 3.9% 5.2% 0.0% 0.0% 2.6% 153 Mozambique 1, Zimbabwe 2 2,000 4.5% 1.8% 4.9% 0.0% 0.0% 0.9% 223 Tanzania 2, Bangladesh 3, Ivory Coast 3 4,000 0.5% 2.2% 8.6% 0.0% 0.0% 0.5% 186 8,000 1.7% 0.9% 8.6% 0.9% 0.0% 0.0% 116 Ukraine 10, Venezuela 14 15,000 0.0% 0.0% 10.0% 0.0% 0.0% 0.0% 20 Turkey 19, Malaysia 23, Russia 24 25,000 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0

Source: Polity IV, Penn, Renaissance Capital

Exchange rates – pressure on the BDT

For the past few years, we have been showing that South Asia was a region of

overvalued currencies. EM investors have loved the India story (it is ready to industrialise,

as Figure 1 above shows) and Frontier investors loved Pakistan when it was preparing to

transition to EM. Portfolio flows have kept South Asian currencies strong. Oil prices were

low, which helped them too. But overvalued currencies on our REER model don’t last

forever unless there is a fundamental change in an economy’s structure.

Change began with Sri Lanka and a 5% devaluation in September 2015, followed by a

steady 5% annualised depreciation ever since (slightly accelerating in recent weeks).

From a peak overvaluation of about 26% in early 2015, the LKR became the least

overvalued south Asian currency by 2017. It is about 10% overvalued now.

Figure 3: FX rates, our REER model estimate of ‘fair’ value (average 1995-2018 rate in today’s money), etc. Data as of 20 June 2018

Current FX rate vs $

FX rate implied by long-term average REER

FX rate if REER falls to

previous lows

Date of REER

low

Long-term average

divided by current rate

IMF 2017E

C/A (% GDP)

IMF 2018E

C/A (% GDP)

Standard deviations away from

historical average

Yvonne's* avg

REER estimate

RenCap YE18

forecast

1-year local

currency yields, %

Kenya 101 157 298 Jul-95 1.56 -6.4 -6.2 1.0 124 107.5 10.7 Vietnam 22,864 28,796 36,655 Jan-04 1.26 4.1 3.0 1.0

2.3

Bangladesh 84.1 104 128 Dec-06 1.24 -1.2 -2.0 1.0 4.2 Kuwait 0.30 0.37 0.45 Jun-95 1.22 2.0 5.8 2.0

1.9

Lebanon 1,512 1,772 3,161 Dec-92 1.17 -25.0 -25.8 1.0 7.2 Estonia 0.86 1.00 1.64 Jan-95 1.15 3.2 2.0 1.0

na

Jordan 0.71 0.82 1.01 Sep-95 1.15 -8.7 -8.5 1.0 7.3 Lithuania 0.86 0.99 1.92 Apr-95 1.15 1.0 -0.1 0.0

0.0

Oman 0.39 0.42 0.49 Nov-07 1.10 -11.5 -6.2 1.0 3.2 Sri Lanka 160 175 220 Feb-04 1.09 -2.9 -2.7 0.0

9.5

Mauritius 35.1 37.9 44.0 Dec-06 1.08 -6.0 -7.4 1.0 3.8 Argentina* 27.8 30.0 65.4 Mar-02 1.08 -4.8 -5.1 0.0

34.4

Nigeria 361 385 867 Apr-95 1.07 2.5 0.5 0.0 313 356 13.0 Romania 4.03 4.20 8.84 Feb-97 1.04 -3.5 -3.7 0.0

3.0

Bahrain 0.38 0.39 0.47 Jun-11 1.02 -3.9 -3.2 0.0 4.2 Croatia 6.37 6.42 7.17 May-00 1.01 3.7 3.0 0.0

0.0

Ivory Coast 580 575 668 Aug-97 0.99 -1.2 -1.5 0.0 561 5.6 Slovenia 0.86 0.85 0.92 Aug-97 0.98 6.5 5.7 0.0

-0.4

Morocco 9.55 9.09 9.68 Aug-12 0.95 -3.8 -3.6 -1.0 2.3 Serbia 102 96.3 163 Feb-01 0.94 -4.6 -4.5 0.0

na

Senegal 580 527 581 Nov-00 0.91 -9.4 -7.9 -2.0 561 5.5 Kazakhstan 341 280 364 Jan-16 0.82 -2.9 -1.4 -1.0

335 8.5

Tunisia 2.61 1.89 2.49 Nov-17 0.73 -10.1 -9.2 -2.0 6.0 *Argentina's inflation data were unreliable for 2007-2015 – we have constructed an REER series using 'shadow' inflation data

Armenia 483 556 867 Mar-95 1.15 -2.6 -2.8 0.0 6.6 Saudi Arabia 3.75 4.15 5.05 Mar-08 1.11 2.7 5.4 1.0

2.5

Georgia 2.46 2.63 4.40 Apr-95 1.07 -9.3 -10.5 0.0 2.65 7.3 Azerbaijan 1.69 1.60 2.62 Jan-95 0.95 3.5 5.6 0.0

8.2

Ukraine 26.5 20.9 40.0 Feb-15 0.79 -3.7 -3.7 -1.0 16.4 Iran 42,440 30,116 68,105 Jun-95 0.71 4.3 7.0 0.0

na

Belarus 2.00 1.33 2.32 Oct-11 0.67 -1.8 -2.5 -1.0 3.8

*Yvonne Mhango, our SSA economist. Note: Govt bonds/bills except: Morocco, Kenya, Senegal, Tunisia, Mauritius, Ivory Coast, Georgia, Azerbaijan, Belarus, Saudi Arabia (auction yields); Oman, Bahrain, Jordan (interbank rates); Argentina (deposit rate); Kazakhstan (12M NDF implied yield).

Source: IMF, Bruegel, Bloomberg, Renaissance Capital

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Renaissance Capital 21 June 2018

Thoughts from a Renaissance man

Pakistan came next, ahead of the July 2018 elections. It had devalued by 2% just a week

ahead of Sri Lanka in 2015, but only began to take its overvalued currency seriously when

it was 24% stronger than its long-term fair value in mid-2017. At the time, it was one of the

most overvalued currencies in emerging markets, with the biggest CA deficit. A 5%

devaluation in December 2017, a 4% move in March 2018 and another move in June

2018, means its overvaluation has shrunk to about 3%.

Figure 4: FX rates, our REER model estimate of "fair" value (average 1995-2018 rate in today’s money), etc.

Current FX rate vs

$

FX rate implied by long-term

average REER

FX rate if REER falls to previous lows

Date of REER

low

Long-term average

divided by current rate

IMF 2017E C/A (% GDP)

IMF 2018E C/A (% GDP)

Standard deviations away from historical

average

Yvonne's avg REER

estimate

RenCap YE18

Forecast

1-year local currency

yields

China 6.47 8.10 10.9 Apr-95 1.25 1.4 1.2 1.0 3.3 India 68.1 79.9 106 Feb-96 1.17 -2.0 -2.3 1.0

6.4

Czech Republic 22.3 25.9 39.3 Jan-95 1.16 1.1 0.3 0.0 0.8 Thailand 32.8 36.5 52.8 Jan-98 1.11 10.8 9.3 1.0

1.5

UAE 3.67 4.05 4.58 Nov-07 1.10 4.7 5.3 1.0 3.2 Qatar 3.65 3.99 5.01 Dec-03 1.09 1.3 2.5 0.0

3.0

Philippines 53.5 57.1 78.9 Feb-04 1.07 -0.4 -0.5 0.0 4.3 Korea 1,105 1,158 1,790 Jan-98 1.05 5.1 5.5 0.0

1.8

Indonesia 13,932 14,596 37,894 Jun-98 1.05 -1.7 -1.9 0.0 6.4 Pakistan 122 125 144 Sep-01 1.03 -4.1 -4.8 0.0

7.1

Russia 63.5 64.3 125 Jan-99 1.01 2.6 4.5 0.0 61.5 6.9 Chile 640 646 797 Jun-03 1.01 -1.5 -1.8 0.0

2.7

Hungary 279 278 372 Apr-95 0.99 3.6 2.5 0.0 0.4 Poland 3.72 3.61 4.38 Nov-97 0.97 0.0 -0.9 0.0

1.4

Taiwan 30.1 29.2 34.3 Nov-09 0.97 13.8 13.6 0.0 1.1 Peru 3.28 3.14 3.50 Jul-07 0.96 -1.3 -0.7 0.0

2.7

Greece 0.86 0.82 0.95 Sep-00 0.95 -0.8 -0.8 0.0 1.0 Malaysia 4.01 3.78 5.73 Dec-98 0.94 3.0 2.4 0.0

3.4

Brazil 3.73 3.27 6.28 Oct-02 0.88 -0.5 -1.6 0.0 7.7 South Africa 13.6 11.7 17.5 Dec-01 0.86 -2.3 -2.9 -1.0 11.3

8.0

Egypt 17.9 15.0 22.9 Dec-03 0.84 -6.5 -4.4 0.0 14 17.6 18.3 Mexico 20.4 15.1 24.6 Mar-95 0.74 -1.6 -1.9 -1.0

8.1

Turkey 4.74 3.50 5.16 Oct-01 0.74 -5.5 -5.4 -1.0 18.4 Colombia 2,914 1,794 3,016 Nov-17 0.62 -3.4 -2.6 -2.0 4.8

Source: IMF, Bruegel, Bloomberg, Renaissance Capital

Below we show the REER of the four currencies together. We do not expect each REER

average to be the same over time – each country has its own special characteristics. But

what is obvious is that on this model, Bangladesh is looking like a significant outlier from

the other three. Its distance from its own average REER of 24% is wider than India’s 17%

overvaluation.

Figure 5: How South Asian currencies have moved in 1995-2018 – with average REER rate as dashed line

Source: Bruegel, Renaissance Capital

70

80

90

100

110

120

130

140

150

160

170

Jan-

95

Jul-9

5

Jan-

96

Jul-9

6

Jan-

97

Jul-9

7

Jan-

98

Jul-9

8

Jan-

99

Jul-9

9

Jan-

00

Jul-0

0

Jan-

01

Jul-0

1

Jan-

02

Jul-0

2

Jan-

03

Jul-0

3

Jan-

04

Jul-0

4

Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Jan-

17

Jul-1

7

Jan-

18

Real Effective Exchange Rate index (2007=100)

India Pakistan Bangladesh Sri Lanka

Strong

Weak

5

Renaissance Capital 21 June 2018

Thoughts from a Renaissance man

Pakistan is developmentally decades behind Sri Lanka – on education, electricity or

investment – and we think this explains the relatively controlled depreciation of the LKR

compared with the jerky currency shifts approved by Pakistan’s Ministry of Finance and

the State Bank of Pakistan (SBP). Curiously, Bangladesh seems to be trying to follow the

Sri Lanka model.

We had been arguing that South Asia could stay overvalued for as long as India did,

because each sector of the smaller economies competes with similar in India. But once

one country moved, a competitive advantage would occur. Sri Lanka accounts for 9% of

South Asia’s clothes exports (and clothes account for 46% of Sri Lanka’s exports), and

7% of food and live animal exports (22% of Sri Lanka’s exports), so two-thirds of its

exports received a benefit from the LKR depreciation, presumably at the expense of the

other three.

Figure 6: What share of South Asia’s (India, Pakistan, Bangladesh, Sri Lanka) exports come from each country Bangladesh India Pakistan Sri Lanka

Total all products 11% 80% 6% 3% Food and live animals 3% 78% 11% 7% Beverages and tobacco 7% 83% 1% 9% Crude materials, inedible, except fuels 5% 87% 5% 3% Mineral fuels, lubricants and related materials 0% 99% 1% 1% Animal and vegetable oils, fats and waxes 2% 85% 5% 9% Chemicals and related products, n.e.s. 1% 97% 2% 0% Manufactured goods (ex-textiles) 1% 95% 2% 2% Textile yarn and related products 7% 62% 30% 1% Machinery and transport equipment 1% 97% 1% 1% Misc. manufactured articles (ex apparel, footwear) 2% 92% 4% 2% Articles of apparel & clothing accessories 51% 32% 9% 9% Footwear 20% 74% 3% 3% Other commodities and transactions, n.e.s. 1% 99% 0% 0% Note: Bold represents where countries’ competition with each other is likely to matter.

Source: UNCTAD

Pakistan also accounts for 9% of South Asia’s clothes exports (this is 25% of Pakistan’s

exports) and 11% of its food and live animal exports (18% of Pakistan’s exports), as well

as 30% of South Asia’s textile yarn and related products (37% of Pakistan’s exports). So

80% of Pakistan’s exports that compete directly with the other three have received a

significant competitiveness boost.

With nearly one-fifth ($9bn) of South Asian clothes exports now 15-20% cheaper than two

years ago, it makes sense that Bangladesh should be getting a little concerned. It

accounts for 51% ($29bn) of all South Asian clothes exports (more than India, which is

32% or $18bn), and these account for 84% of all its exports.

Bangladesh is now roughly 6-7% overvalued vs India, about 13% overvalued vs Sri Lanka

and about 20% overvalued compared with Pakistan. We estimate the minimum wage of a

textile worker is around $60, far below China’s $200-300, but more than three times that

of Ethiopia. The government worker has a minimum wage of $181, above Russia’s $174

(developmentally 80-90 years ahead of Bangladesh) and Vietnam at $148. That looks too

high.

6

Renaissance Capital 21 June 2018

Thoughts from a Renaissance man

Figure 7: Minimum wages from Eurostat on the left (Ireland to Bulgaria) and a variety of sources on the right (Lebanon to Ethiopia) – in dollars at June 2018 exchange rates

Source: Eurostat, Bloomberg, Google searches, Wikipedia

Bangladesh has a track record of hiking the minimum wage near elections, and the

garment unions want it hiked to $1922. Unless the BDT depreciates significantly, this

would further threaten the competitiveness of Bangladeshi exports.

We see nascent signs of overheating in Bangladesh too. Credit growth is high, at 15% in

real terms in February 2018, which is similar to Pakistan and beaten only by Argentina

and Vietnam in EM or FM. This will have contributed to the CA moving into deficit.

Is this 2011 all over again?

What investors might fear is a repeat of the rapid depreciation of 2011, which culminated

in a 10% sell off in just 6 weeks, from BDT77/$ to BDT84/$. Credit growth had been high

then too, and the CA had slipped into deficit. The harvest (as now) had also been poor,

and was lifting inflation. Foreign aid had fallen (and politics means this this could face

threats again) and in 2011 this left the government dependent on financing from the

banks and the central bank itself.

We think there are some key differences. Reserves provided just four months of import

cover in 2010, which fell below three months in 2011. Today, the number is around eight

months. Inflation is around 6% while in 2011 it was in double digits. Bangladesh had just

experienced a retail-led equity boom that had imploded, and this is quite different now.

There is not such an obvious trigger for a sharp depreciation today (but December 2011

was a surprise too).

2 http://www.industriall-union.org/bangladesh-garment-workers-call-for-increased-minimum-wage

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Minimum wage based on 19 June 2018 exchange rates - Eurostat (lhs) and many other sources (rhs) via Renaissance Capital, note data on right-hand side may be mix of gross or net wages (not so reliable)

Blue = EM Green = FM * = avg mix of min wages

7

Renaissance Capital 21 June 2018

Thoughts from a Renaissance man

Figure 8: BDT vs other key currencies

Source: Bloomberg, Renaissance Capital

However, we do think the BDT needs to depreciate by 15-20% in real terms. It has

depreciated since the peak overvaluation in mid-2017, but it is still more than 20%

overvalued relative to its own history, and this has been true in only 12% of months since

January 1995.

Has Bangladesh structurally changed, so that a stronger currency is justified? In 1995,

there were more primary exports (one-fifth were food, animals and yarn), but 63% back

then were textile exports and today this ratio is 84%. That is a limited change compared

with China, which used to be an agricultural and textile exporter but now makes iPhones,

ships and cars. We think China can afford a currency that looks overvalued in REER

terms. We do not think Bangladesh can, especially if large minimum wage hikes are

granted. As in Turkey after its 2016 minimum wage hike, currency depreciation will be

needed to restore competitiveness.

Figure 9: The structure of Bangladeshi exports, 1995, 2000, 2005, 2010 and 2016 1995 2000 2005 2010 2016

Food and live animals 9% 7% 6% 4% 3% Beverages and tobacco 0% 0% 0% 0% 0% Crude materials, inedible, except fuels 3% 1% 2% 2% 1% Mineral fuels, lubricants and related materials 0% 0% 0% 1% 0% Animal and vegetable oils, fats and waxes 0% 0% 0% 0% 0% Chemicals and related products, n.e.s. 3% 1% 2% 1% 1% Manufactured goods (ex-textiles) 7% 4% 3% 2% 1% Textile yarn and related products 10% 7% 7% 7% 5% Machinery and transport equipment 1% 1% 1% 1% 1% Misc. manufactured articles (ex apparel, footwear) 2% 1% 1% 1% 1% Articles of apparel & clothing accessories 63% 76% 77% 80% 84% Footwear 1% 1% 1% 1% 2% Other commodities and transactions, n.e.s. 1% 0% 0% 0% 0%

100% 100% 100% 100% 100%

Source: UNCTAD

Meanwhile, on the import side, a crude petroleum/petroleum product bill in the range of

$17-19bn in 2007-2010, soared to $38-39bn in 2011-2013, before falling back to $21bn in

2015-2016 – and rose back to $32bn in the 12 months to February 2018. OPEC success

0.80

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-04

Apr

-05

Sep

-05

Feb

-06

Jul-0

6

Dec

-06

May

-07

Oct

-07

Mar

-08

Aug

-08

Jan-

09

Jun-

09

Nov

-09

Apr

-10

Sep

-10

Feb

-11

Jul-1

1

Dec

-11

May

-12

Oct

-12

Mar

-13

Aug

-13

Jan-

14

Jun-

14

Nov

-14

Apr

-15

Sep

-15

Feb

-16

Jul-1

6

Dec

-16

May

-17

Oct

-17

Mar

-18

BDT % YoY vs $, EUR, INR

BDT vs $ BDT vs EUR BDT vs INR

Depreciation

Appreciation

8

Renaissance Capital 21 June 2018

Thoughts from a Renaissance man

in partly reversing the 2H17/1H18 oil price rise would take some pressure off

Bangladesh3.

To conclude, we think Bangladesh needs to raise the pace of currency depreciation. The

current pace implies BDT87/$ in December 2018, BDT95/$ by end-2019, and BDT100 by

end-2020, but our estimate of BDT ‘fair value’ is BDT104/$ today.

Sri Lanka was able to make progress with only a 5% annual depreciation, but this was on

top of a 5% one-off depreciation at the beginning. Moreover, it had first-mover advantage,

and is still depreciating its currency. Bangladesh will not claw back the loss of

competitiveness if it depreciates at the same pace as Sri Lanka. Second, we suspect the

authorities would ideally want to wait until the 4Q18 elections before increasing the pace,

but by waiting they might also have to make a one-off devaluation as well. Third, a

stronger dollar against the euro is a problem, given that 56% of exports go to the EU.

Fourth, any hike to minimum wages will increase medium-term pressure for currency

depreciation. Given our expectations, we think BDT depreciation needs to pick up to an

annualised rate of 10% and stay there for at least two years.

We think Bangladesh may be able to avoid that faster depreciation if the dollar weakens

substantially. Any significant fall in the oil price would also help. Leaning against a big

wage hike would also help justify a more modest pace of BDT deprecation.

3 Note there is some offset to the oil bill via higher remittances from workers in the Gulf when oil

prices are high.

Frontier

Figure 11: Performance, $ (31 Dec 12 = 100) Figure 12: Economic outlookLocal Currency BDT IMF Forecasts 2016 2017 2018 2019S&P / Moody's Rating BB-/Ba3 NGDP_RPCHReal GDP (% YoY) 7.2 7.1 7.0 7.0Weight in MSCI FM (%) 2.8% NGDPDPCGDP/Capita, $ 1,459 1,602 1,734 1,878MSCI Index MXBD LP Population, mn 161.5 163.2 164.9 166.62018 P/E 16.2 PCPIEPCHCPI (year-end, %YoY) 5.7 5.9 6.0 6.02018 EPS Growth 13.4% BCA_NGDPDC/A balance (% of GDP) 0.6 -1.2 -2.0 -2.3Trailing P/B 4.3 GGXCNL_NGDPGovt. bal. (% of GDP) -3.4 -3.3 -4.1 -4.6Beta to EM 0.1 Bloomberg consensusMSCI Full MktCap, $bn 12.1 Real GDP (%YoY) 7.2 7.1 6.9 6.8MSCI FF MktCap, $bn 3.4 CPI (year-end, %YoY) 5.7 5.9 na naNo. of Companies 5 C/A balance (% of GDP) 0.6 -1.2 -1.5 -1.63M ADTV ($mn) 4.6 Key policy rate (year-end) 6.00 6.00 na naLocal Index DSEX FXMktCap ($bn) 37.9 BDT vs $ 79 83 na naNo. of Companies 247 BDT vs EUR 83 99 na na3M ADTV ($mn) 53.6Note: EPS growth excludes -ve to +ve earnings changes

Figure 13: 3MADTV, $mn Figure 14: Valuations vs EM, 12M Fwd P/E (x) Figure 15: MSCI sector weights

Figure 16: Population, '000 Figure 17: Export destinations, total: $31.3bn Figure 18: Currency and Real effective exchange rate

Source for all tables and charts: IMF, Bloomberg, MSCI

BangladeshFigure 10: Key data

30

50

70

90

110

130

150

170

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15Ju

l-15

Jan-

16Ju

l-16

Jan-

17Ju

l-17

Jan-

18

MSCI Bangladesh ($) MSCI Frontier ($)

0.0

50.0

100.0

150.0

200.0

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15Ju

l-15

Jan-

16Ju

l-16

Jan-

17Ju

l-17

Jan-

18

MSCI Bangladesh ($mn)Bangladesh local index ($mn)

0

5

10

15

20

Jan-

13Ju

l-13

Jan-

14Ju

l-14

Jan-

15Ju

l-15

Jan-

16Ju

l-16

Jan-

17Ju

l-17

Jan-

18MSCI Bangladesh Frontier

58%17%

16%

9%Healthcare

Financials

Telecoms

Materials

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1990

1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

0-19 20-64 65+

0%2%4%6%8%10%12%14%

0.0

1.0

2.0

3.0

4.0

5.0

Germ

any

US UKSp

ainFr

ance Italy

Nethe

rland

sCa

nada

Polan

dCh

inaJa

pan

Belgi

umDe

nmar

k

Export, 2017 ($bn)Export, 2017 (% of total), RHS 80

100

120

140

160

18040

60

80

100

120

Jan-

00Ja

n-01

Jan-

02Ja

n-03

Jan-

04Ja

n-05

Jan-

06Ja

n-07

Jan-

08Ja

n-09

Jan-

10Ja

n-11

Jan-

12Ja

n-13

Jan-

14Ja

n-15

Jan-

16Ja

n-17

Jan-

18

BDT vs $BDT vs EURBangladesh REER (Dec 07 =100), RHS

Weaker

Stronger

Renaissance Capital 21 June 2018

Thoughts from a Renaissance man

9

Frontier

Figure 19: Index and key stock data (by free float market cap), May 2018 dataMarket Float 3M US$ performance (%) 12MF Trail 12MF 12MF # of MSCI

cap Mcap ADTV P/E P/B RoE DY Analyst WeightTicker Name Sector ($mn) ($mn) ($mn) 1M 3M 12M (x) (x) (%) (%) recs. (%)MXBD MSCI Bangladesh 12,119 3,405 4.6 -7.1 -6.3 4.4 15.6 4.3 30.1 2.7 10 2.8%SQUARE BD Square Pharma Healthcare 2,518 1,763 1.0 -7.0 -9.4 5.4 15.1 4.3 23.9 2.0 3 52%BRAC BD BRAC Bank Financials 977 586 1.6 -11.7 3.7 23.5 13.8 2.9 19.6 1.3 4 17%GRAM BD Grameenphone Telecoms 6,843 547 1.1 -9.3 -12.0 23.2 16.6 13.1 100.9 6.2 2 16%LHBLBD BD LHBL Materials 760 304 0.6 -11.2 -9.8 -18.1 na 4.4 na na na 9%RENATA BD Renata Healthcare 1,021 204 0.1 -1.5 -4.0 23.0 21.7 6.7 23.8 na 1 6%BXPHAR BD Beximco PharmaceFinancials 480 460 0.4 -6.1 -6.6 -11.9 14.5 1.6 10.8 2.0 2 naTITASGAS BD Titas Gas Transm Energy 446 446 0.1 -7.3 -10.5 -25.8 na 0.6 na na na naBATBC BD Brit Amer Tobacc Cons. Staples 2,413 416 0.0 -1.2 -7.5 23.5 17.8 7.9 39.5 3.4 2 naOLYMPI BD Olympic Inds Ltd Cons. Staples 573 408 0.1 -9.0 -8.2 -14.0 19.8 9.0 35.7 2.9 2 naISLAMI BD Islami Bank Bang Financials 431 284 0.3 -13.2 -29.8 -31.3 11.4 0.7 6.1 3.5 1 naCITYBA BD City Bank Ltd Financials 374 271 0.6 -2.4 -7.5 5.8 9.1 1.3 12.6 na 1 naPOWERGRI BD Power Grid Co Of Utilities 251 251 0.0 -7.0 -9.3 -16.5 na 0.5 na na na naBEXIMC BD Beximco Export Industrials 278 235 2.3 -8.5 10.2 -12.8 na 3.9 na na na naNBL BD Natl Bank Ltd Financials 312 235 0.3 -6.6 -10.6 -0.7 na 0.6 na na na naIDLC BD Idlc Finance Financials 303 218 0.2 -2.8 -6.4 -6.4 na 2.0 na na 1 naEBL BD Eastern Bank Ltd Financials 314 215 0.1 -9.1 -14.7 8.8 8.0 1.2 13.9 5.6 2 naPUBALI BD Pubali Bank Ltd Financials 278 198 0.0 -0.6 -13.6 -2.8 na 0.9 na na na naALARAB BD Al-Arafah Islami Financials 300 185 0.8 -2.0 3.3 44.4 na 1.3 na na na naSUMITPOW BD Summit Power LtdUtilities 453 180 0.2 -5.1 -1.6 -11.2 na 1.3 na na na naRUPALI BD Rupali Bank Ltd Financials 171 171 0.2 -11.7 -11.5 80.9 na 1.0 na na na naICB BD Invest Corp Bang Financials 981 167 0.1 -5.2 -11.5 -30.2 na 2.1 na na na naIFIC BD Intl Finance Inv Financials 202 164 0.2 -6.8 -11.4 -12.9 na 0.8 na na na naSEB BD Southeast Bank Financials 188 153 0.1 -9.9 -12.5 -5.3 na 0.6 na na na naPB BD Prime Bank Ltd Financials 240 150 0.1 -10.3 -9.0 -11.7 8.0 0.8 9.6 3.9 1 naBSRM BD Bsrm Steels Ltd Materials 291 150 0.1 -6.8 -0.3 -24.3 na 2.1 na na na naBKASIA BD Bank Asia Ltd Financials 215 149 0.0 -12.0 -16.1 14.4 na 0.8 na na na naACI BD Aci Ltd Industrials 198 147 0.3 -11.9 -16.8 -29.7 na 1.6 na na 1 naIFAD BD Ifad Autos Ltd Cons. Disc. 291 147 0.9 -4.7 -5.6 13.5 15.4 27.7 21.2 na 1 naSJIB BD Shahjalal Islami Financials 232 146 0.1 -10.3 -15.6 58.5 na 1.4 na na na naUCB BD United CommerciaFinancials 224 145 0.2 -12.9 -14.9 -1.2 7.9 0.7 8.5 na 1 naEXIM BD Exim Bank Financials 198 138 0.3 -19.0 -19.9 11.6 na 0.6 na na na naACMELAB BD Acme LaboratoresHealthcare 242 137 0.1 -7.0 -13.8 -18.9 10.9 1.2 9.9 na 1 naBASR BD Bangladesh Steel Materials 271 134 0.6 -0.6 13.1 -14.5 na 2.2 na na na naPADMAO BD Padma Oil Co Ltd Energy 270 134 0.1 -1.4 -1.1 -8.6 na 2.1 na na na naDOREENPW BD Doreen Power GenUtilities 125 125 0.5 -8.4 -5.2 -22.9 na 3.7 na na na naBBSCABL BD Bbs Cables Ltd Telecoms 124 124 0.7 -6.3 -16.3 735.7 na na na na na naLBF BD Lankabangla Fina Financials 159 124 0.7 -13.0 -20.6 -22.7 na 1.1 na na na naONEB BD One Bank Ltd Financials 159 123 0.2 -15.9 -13.9 -11.4 na 1.0 na na na naMTBL BD Mutual Trust Bnk Financials 207 122 0.1 4.9 2.6 43.8 na 1.7 na na na naDELTAL BD Delta Life Insur Financials 151 120 0.2 -5.3 0.5 6.0 na 11.0 na na na naNCCB BD Ncc Bank Ltd Financials 164 120 0.1 -5.2 -6.4 24.9 na 0.8 na na na naMERBNK BD Mercantile Bank Financials 172 116 0.6 -8.0 -17.5 3.8 na 0.8 na na na naSOCIN BD Social Islami Financials 153 114 0.2 -11.9 -21.8 -23.7 na 1.0 na na na naABBANK BD Ab Bank Ltd Real Estate 113 108 0.2 -22.5 -27.9 -28.4 na 0.4 na na na naMJL BD Mjl Bangladesh Materials 358 102 0.2 -1.7 -9.3 -18.2 na 3.0 na na na naUTTARA BD Uttara Bank Ltd Financials 113 99 0.2 -15.9 -19.2 -1.2 na 0.7 na na na naNATLIF BD Natl Life Insura Real Estate 165 98 0.0 -2.3 -2.1 -5.8 na 14.7 na na na naMPL BD Meghna PetroleumEnergy 238 98 0.0 -0.3 -3.5 -8.7 na 1.8 na na na naJMOIL BD Jamuna Oil Co Energy 240 96 0.1 -2.1 -4.2 -13.9 na 1.1 na na na naDBHF BD Delta Brac Financials 191 93 0.1 -3.0 -1.6 11.3 na 3.4 na na na naDKBK BD Dhaka Bank Financials 141 93 0.3 -1.4 -7.6 -7.7 na 0.7 na na na naLINDEBD BD Linde Bangladesh Materials 223 89 0.1 -2.4 -0.8 -9.3 na 5.1 na na na naTRBK BD Trust Bank Ltd Financials 222 89 0.1 -14.3 -18.0 29.4 na 1.4 na na na naDUBA BD Dutch Bangla Ban Financials 280 85 0.1 -5.1 -1.6 12.2 na 1.2 na na na na

Source: MSCI, Bloomberg

Bangladesh

Renaissance Capital 21 June 2018

Thoughts from a Renaissance man

10

Bangladesh 739 BGD 513 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Ratings (M/S&P/F) Ba3/BB-/BB- EODB Rank: 177 (176) - Weak Corruption Rank: 143 (145) - Weak RenCap Legal score: 7 (8) - Weak

Year 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018E 2019EActivityReal GDP (% YoY) 6.5 5.5 5.3 6.0 6.5 6.3 6.0 6.3 6.8 7.2 7.1 7.0 7.0 NGDP_RPCHInvestment (% GDP) 26.2 26.2 26.2 26.9 27.9 28.3 28.5 28.7 29.3 30.1 31.1 32.0 32.5 NID_NGDPUnemployment rate year-end (%) na na na na na na na na na na na na na LURNominal GDP (lcl bn) 5,892 6,669 7,513 8,567 9,855 11,271 12,713 14,297 16,243 18,543 21,086 23,939 27,192 NGDPNominal GDP ($bn) 86 97 109 122 131 142 161 184 208 236 261 286 313 NGDPDPopulation (mn) 146 148 150 151 153 155 157 158 160 162 163 165 167 LPGDP per capita ($) 585 656 728 808 857 916 1,030 1,163 1,303 1,459 1,602 1,734 1,878 NGDPDPCStock of bank credit (lcl, bn) 1,892 2,284 2,712 3,473 4,114 4,790 5,189 6,125 6,978 8,131 9,689 11,530 13,490Lending/GDP (%) 32.1 34.2 36.1 40.5 41.7 42.5 40.8 42.8 43.0 43.8 46.0 48.2 49.6Gross domestic saving (% of GDP) 27.8 28.2 29.0 29.1 29.4 30.2 29.8 29.1 30.3 30.6 29.8 29.9 30.1 NGSD_NGDPPricesCPI (average % YoY) 9.1 8.9 4.9 9.4 11.5 6.2 7.5 7.0 6.2 5.7 5.7 6.0 6.0 PCPIPCHCPI (year-end, % YoY) 11.6 6.7 7.7 11.6 7.6 7.1 7.3 6.1 5.9 5.7 5.9 6.0 6.0 PCPIEPCHFiscal balance (% of GDP)Consolidated government balance -2.2 -4.0 -3.2 -2.7 -3.6 -3.0 -3.4 -3.1 -4.0 -3.4 -3.3 -4.1 -4.6 GGXCNL_NGDPPrimary government balance -0.6 -1.9 -1.0 -0.8 -1.9 -1.1 -1.4 -1.0 -1.9 -1.5 -1.6 -2.4 -2.7 GGXONLB_NGDPTotal public debt (% of GDP) 41.9 40.6 39.5 35.5 36.6 36.2 35.8 35.3 32.4 32.1 32.4 32.7 33.4 GGXWDG_NGDPExternal indicatorsExports ($bn) 11 12.2 13.6 14.4 16.5 23.1 22.3 25.9 28.4 29.9 30.1 31.3 na na TXG_FOB_USDImports ($bn) 16 18.5 23.8 21.8 27.8 36.1 34.2 37.5 41.6 39.4 41.2 47.8 na na TMG_CIF_USDTrade balance ($bn) -6.2 -10.2 -7.4 -11.3 -13.0 -11.9 -11.6 -13.2 -9.5 -11.0 -16.4 na naTrade balance (% of GDP) -7.3 -10.5 -6.8 -9.2 -10.0 -8.4 -7.2 -7.2 -4.6 -4.7 -6.3 na naCurrent account balance ($bn) 0.6 1.2 2.7 0.5 -1.3 1.0 1.9 2.1 3.6 1.4 -3.2 -5.8 -7.2 BCACurrent account balance (% of GDP) 0.7 1.2 2.4 0.4 -1.0 0.7 1.2 1.2 1.7 0.6 -1.2 -2.0 -2.3 BCA_NGDPDNet FDI ($bn) 0.7 1.1 0.7 0.9 1.1 1.3 1.6 1.6 2.2 2.3 na na naNet FDI (% of GDP) 0.8 1.1 0.6 0.7 0.9 0.9 1.0 0.8 1.1 1.0 na na naC/A balance plus FDI (% of GDP) 1.5 2.3 3.1 1.2 -0.2 1.6 2.2 2.0 2.8 1.6 na na naExports (% YoY, value) 13 12 6 15 40 -4 16 10 5 1 4 na naImports (% YoY, value) 15 29 -8 27 30 -6 10 11 -5 4 16 na naFX reserves (ex gold, US$bn) 5.2 5.7 10.2 10.6 8.5 12.0 17.6 21.8 27.0 31.8 32.8 na naImport cover (months of imports) 3.4 2.9 5.6 4.6 2.8 4.2 5.6 6.3 8.2 9.3 8.3 na naExternal DebtGross external debt YE ($bn) 22 24 27 23 22 26 32 35 38 41 47 na naGross external debt YE (% of GDP) 25 25 25 19 17 18 20 19 18 18 18 na naGross external debt YE (% of exports) 177 177 186 140 97 117 123 122 128 137 149 na naShort-term external debt YE ($bn) 2 3 3 0 0 2 4 3 7 8 0 na naShort-term external debt YE (% of GDP) 3 3 3 0 0 1 2 2 3 3 0 na naShort-term external debt YE (% of exports) 19 22 23 1 0 8 14 12 22 26 0 na naShort-term external debt to reserves (%) 44 54 32 2 0 14 21 16 25 25 0 na naTotal debt service ($bn) 1 1 1 1 2 2 2 2 2 na na na naTotal debt service (% of GDP) 1 1 1 1 1 1 1 1 1 na na na naTotal debt service (% of exports) 8 7 7 7 7 7 7 7 6 na na na naTotal debt service to reserves (%) 19 17 10 11 19 14 11 9 6 na na na naCurrency and monetary policy IMF forecastsKey policy rate (% YE) na 8.8 4.5 5.5 7.3 7.8 7.3 7.3 7.3 6.8 6.8 6.8 naBroad money growth (%YoY) 14.7 17.9 20.7 21.7 19.1 19.0 15.6 13.3 13.1 13.8 10.7 na na FM2_XDCExchange rate (€) annual average 94.4 101.1 96.2 93.1 104.7 102.3 104.7 103.2 86.6 87.1 91.2 103.8 109.0Exchange rate ($) annual average 68.8 68.7 69.0 70.2 75.2 79.5 78.8 77.7 78.0 78.7 80.7 83.8 86.9Credit rating history Latest

Moody's - - - Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 Ba3 naStandard & Poor's - - - BB- BB- BB- BB- BB- BB- BB- BB- BB- naFitch - - - - - - - BB- BB- BB- BB- BB- naNote: 2018-19E exchange rate forecasts are the IMF implied exchange rates from April 2018 World Economic Outlook

Source: IMF, World Bank, UNCTAD, Bloomberg

Renaissance Capital 21 June 2018

Thoughts from a Renaissance man

11

Figure 20: Bangladesh key economic indicators, May 2018 data

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