VZCZCXRO5196
PP RUEHAST RUEHBI RUEHCI RUEHLH RUEHPW
DE RUEHKA #1070/01 2881232
ZNR UUUUU ZZH
P 141232Z OCT 08
FM AMEMBASSY DHAKA
TO RUEHC/SECSTATE WASHDC PRIORITY 7524
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLO/AMEMBASSY LONDON 1812

UNCLAS SECTION 01 OF 02 DHAKA 001070 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR SCA/PB, EEB/EPPD 
TREASURY FOR YEE WONG 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV EAID EAGR PGOV BG
SUBJECT: BANGLADESH PARTIALLY INSULATED FROM GLOBAL FINANCIAL CRISIS 
- FOR NOW 
 
Summary 
------- 
 
¶1.  (SBU) Despite a sharp drop in local stock markets on October 12, 
Bangladesh's economy is relatively insulated -- for now -- from the 
effects of the global financial crisis, according to local 
economists and bankers.  Should a global recession last for an 
extended period, however, Bangladesh could see a slowdown in several 
areas, including the key drivers of its economy, garment exports and 
remittances. 
 
Impact likely to be minor in the short term 
---------------------------- 
 
¶2.  (U) Until October 12, Bangladesh's financial markets remained 
largely unaffected by the meltdown of the financial sector in the 
United States, Europe and parts of Asia.  Key stock indices fell by 
one to two percent the week of October 5, more the result of a 
change in loan ratios by some local banks than a response to the 
global crisis.  When markets opened on the 12th, however, the 
benchmark Dhaka Stock Exchange index fell by 3 percent, the largest 
one-day drop in four months.  This decline appears to be a reaction 
to last week's steep declines in major stock markets worldwide. 
Stocks rebounded somewhat October 13; main indices gained about 1 
percent. 
 
¶3.  (U) The head of the Dhaka Stock Exchange told the media on 
October 13 there was no reason for panic among Bangladesh portfolio 
investors, mainly because Bangladesh financial institutions were not 
strongly integrated into world markets.  Foreign portfolio 
investment accounts for less than three percent of the total market 
capitalization of the nation's stock markets.  Also, capital 
controls here restrict Bangladesh portfolio investment abroad. 
 
¶4.  (U) Similarly, Bangladesh's commercial banks, as well as its 
central bank, have limited exposure to the crisis.  One local 
economist reported that the central bank, Bangladesh Bank, held its 
foreign currency reserves in cash and U.S. Treasury bills.  Local 
commercial banks have an estimated $500 million in foreign currency 
holdings, none of which is held in the highly speculative financial 
instruments that have brought down some of the world's largest 
investment banks.  In addition, many commercial banks with funds in 
overseas banks are moving these funds to Bangladesh Bank. 
 
¶5.  (U) According to local bankers and economists, the most 
important thing Bangladesh must do in the short term is manage its 
exchange rate in the wake of exchange rate fluctuations in key world 
currencies and the currencies of Bangladesh's neighbors.  And as 
credit freezes worldwide, at least one economist expressed concern 
that developing countries like Bangladesh might experience 
constraints on trade finance, which keeps international trade -- 
including exports of products like garments - functioning smoothly. 
 
 
Greater impact possible in the long term 
---------------------------------------- 
 
¶6.  (U) Should the financial crisis lead to a lengthy global 
recession, Bangladesh's economy could be harmed more greatly, 
according to local experts.  They expressed concern about the impact 
on Bangladesh's critical ready-made garment (RMG) industry, which 
exported more than $10 billion in garments in fiscal year 2008, 
mainly to the United States and Europe.  As consumer spending in the 
United States and Europe declines, RMG orders could fall; often 
unreliable local media reported a decrease in orders by JCPenney and 
the closure by The Gap, Ann Taylor, Lane Bryant and others of stores 
in the United States.  The media reports speculated these 
developments could reduce the $3.2 billion in Bangladesh garment 
exports to the United States. 
 
¶7.  (SBU) On the other hand, Bangladesh exports mostly medium- to 
low-end apparel, towards which consumers could gravitate despite 
reduced consumption or disposable income.  One expatriate apparel 
buyer told Econoff that many manufacturers had orders through 
January 2009.  After that, however, orders could decline. 
Alternatively, the buyer said, large apparel outlets could place 
more orders of smaller quantities throughout the apparel season as a 
way of hedging against lower retail sales, rather than the usual 
practice of one huge order at the beginning of a season. 
 
Remittances 
----------- 
 
¶8.  (U) Bangladesh's economy also relies heavily on remittances from 
overseas workers, most of whom work in the Persian Gulf.  In the 
last fiscal year, overseas remittances to Bangladesh exceeded $8 
 
DHAKA 00001070  002 OF 002 
 
 
billion, and some experts have predicted remittances could reach $10 
billion this fiscal year.  Should falling oil prices lead to a 
contraction in Persian Gulf economies, Bangladesh's remittances 
could be hit. 
 
Foreign Direct Investment 
------------------------- 
 
¶9.  (U) Bangladesh, like other developing nations, could see reduced 
levels of foreign direct investment (FDI) in the medium term.  FDI 
numbers in Bangladesh, $666 million in 2007, have remained low in 
comparison to other Asian economies and have declined in the last 
couple years.  At a time when Bangladesh's energy and infrastructure 
needs --areas that have attracted FDI here -- are greater than ever, 
the current credit crunch bodes ill for Bangladesh's ability to 
improve its FDI performance. 
 
Foreign Assistance 
------------------ 
 
¶10.  (U) A few analysts have expressed concern that large bailouts 
by the USG and European governments could result in a future 
decline, at least temporarily, in those governments' ability to 
provide foreign assistance to developing nations, including 
Bangladesh.  While foreign aid accounts for only 2 percent of 
Bangladesh's GDP, international donors play a leading role in areas 
critical to Bangladesh's long-term development, including 
infrastructure, health, and education. 
 
Government Reassurance 
---------------------- 
 
¶11.  (U) Top Government of Bangladesh (GOB) officials and the 
Governor of Bangladesh Bank have made public statements to reassure 
Bangladeshis about short and long term prospects for the nation's 
economy.  Bangladesh Bank has been transparent in identifying where 
it and commercial banks hold the nation's foreign currency reserves, 
i.e. in safe financial instruments like U.S. Treasury bills.  GOB 
and business leaders said they would monitor closely the impact of 
the crisis on Bangladesh's RMG sector and would seek measures to 
minimize threats to the sector.  Bangladesh's leaders also are 
working to identify potential effects of the crisis on the nation's 
poor.  (NOTE:  More than 80 percent of Bangladeshis subsist on less 
than two dollars a day.  END NOTE.) 
 
Comment 
------- 
 
¶12.  (SBU) Another casualty of the financial crisis could be the 
USG's ability to argue the merits of a market-based economy.  In 
Bangladesh, where underlying economic beliefs tend more toward a 
managed economy than capitalism, the financial crisis is likely to 
provide ammunition for those who support a greater government role 
in the economy.  Fortunately, Bangladesh's best known economist, 
Nobel laureate Muhammed Yunus, said publicly over the weekend that 
while government solutions were needed in the short run to address 
the current crisis, in the long run market mechanisms continued to 
be the best means of addressing economic challenges.  In contrast, 
an economist affiliated with one of Bangladesh's main political 
parties last week pointed to the current crisis as a reason for the 
nation's next government to remain actively involved in Bangladesh's 
economy.  As Bangladesh prepares for a transition back to democracy, 
we will need to work even harder to convince many Bangladeshi 
leaders that the key to economic growth here is less, not more, 
government intervention in the markets. 
 
Moriarty