Vibrant corporate bond market key to higher economic growth

James Carville, a key member of Bill Clinton's first presidential campaign, remarked way back in 1993: "I used to think if there was reincarnation, I wanted to come back as the president or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

The global bond market has more than tripled in the past 15 years and exceeds $100 trillion. That is 40 percent larger than the total value of global stock markets.

In Bangladesh, bond market and its developments are mostly confined to words than actions. However, government bond with 7.86 percent of GDP is relatively discernible. Thanks go to the Bangladesh Bank. The BB's concentrated efforts on strengthening market infrastructure have enhanced the reliability of the government securities market.

Barriers to the development of the bond market include: dominance of savings certificates in public debt collection, a lack of initiatives to issue bond for financing major infrastructure projects undertaken by the government, city and municipality corporations, captive bond market of Bangladesh with mandatory rules, and a lack of good reasons in fixing interest rate on savings and investment instruments.

Consequently, the public bond market fails to offer a representative yield curve, which is being considered as essential for development of a long-term corporate bond market.

On the other hand, the number and amount of corporate bonds in Bangladesh are required to be searched with a high powered binocular. At present, the size of the corporate bond market is very scanty -- only 0.2 percent of GDP, whereas China and India are having 18.63 percent and 2.89 percent respectively.

It is heartening to know that Pran Group and Ashuganj Power Limited are coming up very soon with two debt securities with public placement. Additionally, banks have, although all are in private placement, issued a total of 57 subordinate bonds amounting to Tk 19,824 crore since 2009 to insert capital under tier II.

This indicates that efforts are in place to entice funds through issuing debt securities. Also, the current and possible future structure of the economy deduces that a viable corporate bond market is needed.

Bangladesh moves to undertake large infrastructure projects and the housing sector is coming up as a major destination for finance. Capital-intensive large industries and service units are increasingly being set up. A huge amount of long-term debt capital, alongside equity capital, is necessary to finance this inevitable change of the economy.

Debt capital is always preferable up to a certain limit due to inborn benefits of its lower cost compared to costs of equity.

But the capacity of the banks with short-term tenure funds is narrowed to provide long-term finance. It creates the essentiality of the corporate bond market. 

From the investor perspective, it is revealed that a large and diversified investor base containing public pension funds, insurance companies and other contractual savings institutions is coming up day by day and they prefer investing in long-term debt securities.

Currently, service-holders of government, university and other autonomous bodies are entitled to get retirement pension. There are also private funds and gratuity schemes for the corporate sector, banks or nongovernmental organisations.

Many who work in other sectors at home and abroad and contribute to the development of the country during their working life are being expected to be included under the pension system or retirement benefit schemes in future. It is, therefore, believed that accumulated amount of pension funds will be enormous in future.

The insurance sector is supposed to expand as increasing per capita income and swelling uncertainty in society and environment have positive impact on propensity of being insured.

Mutual funds are gradually recognised as less risky investment instruments for general investors. A certain percentages of mutual funds are usually invested in long-term fixed income securities.

Another change is likely to be happening in society because of an increasing trend of ageing population. Since older people tend to save than to spend and their preference is fixed-income long-term securities, a burgeoning investor class is looming to invest in corporate debt securities. 

In this backdrop, a vibrant bond market, especially the corporate bond market is a priority. 

The Bangladesh Securities and Exchange Commission (BSEC) has the most important role in deepening and diversifying the corporate bond market. The BSEC may consider forming a committee comprising internal and external experts to prepare a road map for doing the needful to create space for corporate bonds.

The committee may work with different stakeholders to address issues like rationalisation of interest rates, creation of a benchmark yield curve at least for 10 years, forming a friendly tax environment, offering a variant debt securities considering ground reality, lessening issuing costs and formalities, encouraging selective corporate houses with good governance to issue debt securities, reforming laws for institutional savers to invest in corporate securities, and placing a certain percentage of subordinate bonds issued by banks in public placement to develop a solid corporate bond market.

However, it is commonly known that a corporate bond market cannot move forward without strengthening bank and equity financing sector. A financial environment is, therefore, expected where bank debt, equity issues, and bond financing will coexist for bringing momentum in the economic development of the country.

The writer is director for research, development and consultancy at Bangladesh Institute of Bank Management.