Thoughts from a Renaissance man Economics & Strategy 21 June 2018 Charles Robertson +44 (207) 005-7835
[email protected] Mobile +44 7747 118 756 @RenCapMan Vikram Lopez +44 (207) 005-7974
[email protected] Thoughts from a Renaissance man How vulnerable is the Bangladeshi taka? 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.