As Taka weakens, foreign investors withdraw Tk6,000 from shares

Currency devaluation led to a sharp sell-off of foreign investment portfolios in the stock market, with the weakening of the taka against the dollar eroding profits for foreign investors.

The sell-off in foreign investment portfolio stocks has put pressure on the stock market, keeping price indices down.

According to Dhaka Stock Exchange (DSE) data, foreign investment outflow from the stock market was Tk 1,000 crore in the first four months of this year, while inflow was only 300 crore. crores of Tk. Last year, foreign investment outflow was Tk 5,000 crore while inflow was Tk 2,000 crore.

The Bangladesh Bank started a devaluation in August last year to give the economy an edge amid rising import spending and slowing remittances and export earnings.

Foreign investors began to sell equities early in the year to avoid losses related to a possible correction of the exchange rate in the context of a global rise in the price of the dollar following the Russian-Ukrainian conflict.

In January last year, the interbank exchange rate was 84.80 Tk, meaning a foreign investor would receive one dollar for every share sold at that price.

Now, an investor would get less than a dollar even if a stock were sold at the same price, as the interbank exchange rate jumped to 92.80 Tk after continuous devaluation by the Bangladesh Bank in recent months.

Thus the devaluation has been disadvantageous for foreign investors who now find themselves spending more to recover the proceeds of their sales after converting the local currency into dollars.

The equity rate of return was also unable to offset losses from the devaluation as stock market price indices remained lower amid rising inflation and growing nervousness over the global market, market insiders said.

Net portfolio investment turned negative $269m at the end of FY21, compared to positive $44m in FY20, according to Bangladesh Bank data.

The negative net position means that the outflows were greater than the inflows.

Besides the devaluation, another factor discouraging foreign investors from holding shares in Bangladesh is rising interest rates in the US market, said Dr. Zahid Hussain, a former senior economist at the World Bank office in Dhaka.

He said foreign investors started selling stocks from last year to avoid possible losses from devaluation. This is because the difference between the rates of return was no greater than their expected amortization loss.

There is a risk of currency devaluation as the country’s trade deficit widens, so foreign investment is likely to remain sluggish in the coming days, he said.

Rising rates make US Treasury bonds more profitable for foreign investors and there is a possibility of further interest rate increases to keep inflation under control. As a result, investing in US Treasuries is more profitable for them than investing in emerging markets, he added.

The US Federal Reserve recently raised its main interest rate by 75 basis points – the biggest increase since 1994 – to a range of 1.5% to 1.75% to keep inflation under control.

While US inflation had reached 8.6%, a 40-year high, the US Federal Reserve carried out a massive hike, the third since March, in the key rate and with signs of further hikes in the coming months. come.

Ahsanur Rahman, managing director of BRAC Stock Brokerage, the leading brokerage in foreign investment management, said the Bangladesh stock market was no longer attractive to foreign investors due to multiple factors including devaluation and the rise in US rates.

Moreover, many foreign funds from frontier markets closed during the pandemic, which also impacted foreign investment inflows, he said.

Ahsanur said foreign investors have taken safe positions to watch the exchange rate market and may not be active until the rate is stable.

The exchange rate, which had remained stable between Tk 84 and 85 for several years due to central bank intervention, crossed Tk 90 in June for the first time in the country’s history, with the latest rate at 92.80 Tk.

Over the past year and a half, the taka has weakened 9.4% against the dollar.

Currently, insiders believe that the widening trade deficit and the dollar crisis in the market signal a further devaluation of the dollar.

The country’s trade deficit hit an all-time high of $27.56 billion in the first 10 months of the current fiscal year, according to central bank data.

In the proposed budget speech for the next fiscal year, Finance Minister AHM Mustafa Kamal said the taka’s exchange rate against the US dollar would remain competitive, which many believe signifies hints of a new devaluation.

He also said that the stability of foreign exchange reserves would be a big challenge for the government in the context of price volatility in the international market.

However, he stressed the need for foreign investment to sustain growth.

“The government has also organized and sponsored seminars and workshops, road shows and trade shows inside and outside the country. All these arrangements are aimed at identifying potential investors, highlighting opportunities existing investment frameworks, to incentivize them to invest and to accelerate the removal of barriers to investment,” he said.

Although the Securities and Exchange Commission of Bangladesh has organized several road shows in different countries to attract foreign investment in the stock market, its impact has not been reflected in the foreign investment portfolio.

Movement of stock market price indices

The Dhaka Stock Exchange’s broad index fell 16% in eight months, from October last year to May this year. The DSEX hit 7300 in October last year, a year high, but it didn’t last long due to the rapid devaluation of the taka amid a severe dollar crisis in the market. which put pressure on the stock market and dragged the price index to 6100. in May this year, according to the DSE.

Daily turnover also saw a sharp drop to an average of Tk 600 crore from Tk 1800 crore during the same period.

Neighboring India also came under selling pressure in the stock market due to currency devaluation.

Indian stocks fell after the rupee hit a record high of 78.28 rupees to the dollar in June.

Benchmarks Nifty and Sensex plunged 2.64% and 2.68%, respectively, on the day India’s currency topped Rs78 to the dollar, the biggest drop since early March, according to Indian media.

About Meredith Campagna

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