Every country needs an active bond market and Bangladesh is no exception to that rule, said Vinod Kothari during an interview with Dhaka Tribune. He recently came to Bangladesh to attend a IDLC Finance Ltd workshop on bond markets.
Vinod Kothari is an internationally recognised author, trainer and consultant on specialised financial subjects. He lectures around the world including New York, Washington, London, Milan, Malaysia, Bangladesh and so on.
He said the businesses in Bangladesh can avail more debt and wider primary markets and therefore talks should be held on developing such markets in a well-planned manner. Following is the details of his interview.
At what stage is our bond market at the moment?
The market is yet to come out of its primary stage. It needs to be more active, with sufficient buyers and sellers in the market to increase liquidity. It will increase willingness of investors to buy bonds.
Why do we have an illiquid bond market despite having plenty of treasury bills?
It seems like the banks need to hold on to these government issued bonds for meeting regulatory purposes and therefore it is not much of their interest to let go one particular bond to buy another one of the same rate. Plus there may not be enough excess bonds that could be traded.
If so, then should the government consider issuing more bonds to make the market vibrant?
I do not follow the economy of Bangladesh to comment on the macro-economic issues. However, credit crunch (as the action will contract the supply of liquidity) and crowding out effect could take place if government issues more bonds, because they would be taking back the money from the economy. Also these macro-economic decisions are based on the Finance Ministry’s strategy and not specifically restricted to make a market more vibrant. However, I think more bonds and different varieties have to be introduced in the market to make it more vibrant.
How will the corporates benefit from an active market?
Bonds of different types are sources of financing debt, which makes the company’s profile more diversified and therefore reduces risk. In addition to this, the corporates are not into issuing privately placed bonds either. The corporates can publicly list the privately placed bonds, which would make the debt market more active.
We have only three corporate bonds while several others are not even publicly listed. What is your insight on this issue?
There can hardly be any reason behind not listing the privately placed bonds, which are commonly bought by the foreign investors if the cost of listing is not troubling. I am told that, this is the norm in Bangladesh and few corporate claims due to low foreign participation in the equity market, the gain from listing is not significant. This has to be changed in the near future.
How does a bond market align with equity markets that show abnormal trend?
This is the fascinating part, a bond market is less likely to go through a cyclical bubble and burst and therefore it reduces risk to some extent, particularly the systematic risk.
A strong and active bond market is needed to figure out a yield curve while we mostly see corporate bonds have a short tenure. What should be the right approach?
Today, I saw the yield curve of Bangladesh, so there is one that can be used for further calculations. Yes, I do agree that more corporate bonds are needed and also in several varieties so that the companies get various options to finance debt. For instance if municipal bonds and mortgage backed bonds are introduced then the companies would avail switching options and small scale investors could trade and make a profit out of it.
From the perspective of an issuer, why would it issue a bond rather than taking a bank loan, given the risk free rate is too high to begin with?
The risk free rate can be high. A strong debt market is inevitable for a developing economy and no one doubts the relevance of it. The corporates need an alternative to bank borrowings for several reasons including reducing the systematic risk. Once the market is ready, the scenario where getting a bank loan is more convenient than issuing bond, would alter automatically.
Regulators believe a derivative market is on the cards. What are the cons and pros of it for Bangladesh given experts believe the general investors will not be able to handle the sophistication?
Yes, I completely agree that a lot to be summoned but that cannot be a reason to hold back its inclusion. Anything may cause stability and also instability but working towards making it should be the goal. All the problems can be fixed at a particular time. One needs to understand the problems and solve one by one.
