Agenda

• Global Overview• Debt Market in Bangladesh• Challenges• The Roadmap

1

3.1

4.175.17

4.58 4.55

11.27

10.17

-0.81 -0.55 -0.29 -0.28 -0.84

1.21 0.95

-2

0

2

4

6

8

10

12

Treas. Agency Mortgage ABS Credit HY Em. Mkts

Tota

l R

etu

rn (

%)

Dec 2006 Year-to-Date

Calm Returns to Emerging Markets

Continued Robust EM Economic Performance

After the recent shock to emerging markets, bond, equity, and currency markets are climbing back to their late February levels.

The basis for strong emerging market growth —increasing productivity driven by further international diversification of supply chains, financial innovation, and better economic policy management — remains intact

Total Returns for Various Fixed Income Sectors (as of Dec 06)

In 2006, with pressure from rising Treasury yields, emerging markets was one of the two sectors that experienced positive total returns in December 2006 and this out-performance sets to continue well into 2007

Total new issuance in 2006 have exceeded annual historical patterns.

Source: Haver Analytics and Citi

Emerging Markets – Core Inflation (Jun 03 – Feb 07)

5

D e e p L iq u i d i t y i n A s i a P r e v a i l s

A s ia n H e d g e F u n d A s s e ts – C u m u la tiv e

B u y -s id e la u n c h e s – P e r A n n u m

1 22 0

3 5

5 5

7 0

1 4 0

0

2 0

4 0

6 0

8 0

1 0 0

1 2 0

1 4 0

1 6 0

2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6

US

$ i

n B

illi

on

s

A s ia n H e d g e F u n d A s s e ts ( $ B n )

$ 9 , 9 0 2

$ 2 , 9 9 1 $ 3 , 3 2 2

$ 1 0 , 6 0 0

$ 1 5 , 9 0 0 $ 1 6 , 0 0 0

$ -

$ 2 , 0 0 0

$ 4 , 0 0 0

$ 6 , 0 0 0

$ 8 , 0 0 0

$ 1 0 , 0 0 0

$ 1 2 , 0 0 0

$ 1 4 , 0 0 0

$ 1 6 , 0 0 0

$ 1 8 , 0 0 0

2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6

USD

in M

illio

ns

D e m a n d f o r f u n d s w i t h A s i a n s t r a t e g i e s i s e x p e c t e d t o c o n t i n u e g r o w i n g s t r o n g l y o v e r t h e c o m i n g y e a r s d u e t o A s i a ’ s e x p a n d i n g e c o n o m i e s , s t r o n g f i s c a l p o s i t i o n , a n d g r e a t n u m b e r o f u n t a p p e d i n v e s t m e n t o p p o r t u n i t i e s .

N e w P la y e rs H a v e T ra n s fo rm e d th e M a rk e t.

0

1 0 0

2 0 0

3 0 0

4 0 0

5 0 0

6 0 0

7 0 0

8 0 0

1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5

N o . o f M a n a g e r s N o . o f F u n d s

I n c r e a s in g A s ia n p r e s e n c e o f g lo b a l m u lt i - f u n d m a n a g e r s i n p la c e o f s in g le - s t r a t e g y p la y e r s f u r t h e r d e e p e n s l iq u id it y f o r A s ia H Y is s u a n c e

D e m a n d F u r th e r B o o s te d b y M o re F u n d s w ith D iv e rs e S tra te g ie s …

State of the Debt Market in Bangladesh

• GDP of USD 63 Bln • Total Domestic Savings to GDP - 20.3%• Of the Domestic Savings:

• Bank Deposits is 72%• Debt Market is 28%

• Government 99%• Treasury Bills 27%• Treasury Bonds 14%• Saving Schemes 59%

• Private Debt 1%• Government Debt to GDP 47%

• Internal 17%• External 30%

Salient Features

• Fixed Income Market is dominated by Bank deposit and loans• Debt instruments are dominated by the Government• Most activities are on the primary auctions• Number of primary dealers – 9• Few debentures have been issued, otherwise corporate debt is almost non-

existent• Absence of a clearly defined yield curve

– High Govt borrowing rate through the Savings Certificates• Bank deposits are eroded through a sizeable non-performing loan portfolio

held by the nationalized commercial banks• Trading of private debentures is negligible due to the inferior quality of the

instruments. Also, there is lack of product variations.

Salient Features of Govt. SecuritiesGovt. Treasury Bills Bangladesh Bank Bills Govt. Bonds

Issue Tenors 28 days 30 days 5 years91 days 90 days 10 years182 days364 days

Auction Frequency 28 days - weekly 30 days - weekly 5 years - monthly91 days - weekly 90 days - weekly 10 years - monthly182 days - fortnightly364 days - fortnightly

Transferability

Reserve Qualification

Tax

Investment Eligibility for Non-residents

No No Yes

Lock-in Period for Non-

residents

1 year. However, can be transferred to another non-resident

Freely transferable among residents

Yes

10% upfront

Yield28 days T Bills 7.33%91 days T Bills 7.58%182 days T Bills 7.88%364 days T Bills 8.46%

5 year T Bond 10.79%10 year T Bond 12.49%

T Bills and Bonds

Yield

5 Year Bangladesh Savings Certificates 12.00%3 Monthly Savings Certificates 11.50%Pensioners Savings Certificates 12.50%Post Office Savings Certificate 12.00%

Instruments

Government Savings Schemes

Issued debentureDebenture Coupon Year of Flotation (in millions of taka)*Beximco Infusion Ltd 17% 1992 14.5Beximco Synthetics Ltd 14% 1993 240.8Bangladesh Chemical Industries Ltd 17% 1993 3.2Eastern Housing Ltd 15% 1994 202.5Beximco Knitting Ltd 14% 1994 188.4Beximco Fisheries Ltd 14% 1994 94.3Beximco Textiles 14% 1995 222.8B.D. Zipper Ind. Ltd 14% 1995 22.4Beximco Denim Ltd 14% 1995 278.5Bangladesh Luggage Ind. 14% 1996 135.0Arami Cement Ltd 14% 1998 112.5

Prominent Issuers in the Debenture Market

Average Bank Deposit Rate 5.64%Average Bank Loan Rate 11.24%

Bank Deposit & Loan Rate

T e n o r W i s e G o v t S e c u r i t i e s R a t e M o v e m e n t

- T b i l l r a t e s b o t t o m e d i n F e b - 0 5

- T b i l l i n t e r e s t r a t e s m o v e d i n r e v e r s e d i r e c t i o n s o f

i n f l a t i o n m o s t o f t h e t i m e

- C u r r e n t T b i l l r a t e s s h o w i n g a p l a t e a u w i t h a d e c l i n i n g

t e n d e n c y i n t h e l o n g e r t e n o r s

2

4

6

8

10

12

14

Dec

-02

Feb

-03

Ap

r-03

Jun

-03

Au

g-0

3

Oct

-03

Dec

-03

Feb

-04

Ap

r-04

Jun

-04

Au

g-0

4

Oct

-04

Dec

-04

Feb

-05

Ap

r-05

Jun

-05

Au

g-0

5

Oct

-05

Dec

-05

Feb

-06

Ap

r-06

Jun

-06

Au

g-0

6

Oct

-06

Dec

-06

Feb

-07

Ap

r-07

D a te

Yie

ld

28 Day s

91 Day s

18 2 Da ys

36 4 Da ys

2 Y e a r s

5 Y e a r s

10 Y e ar s

In f la t io n

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

12.00

13.0028 91 182

364

730

1825

3650

Tenor (in days)

Yie

ld (%

)

Mar-03

Jan-04

Jun-04

Jan-05

Jun-05

Jan-06

Jun-06

Jan-07

Apr-07- The curve started shifting downward from Mar 03

- Bottomed in Feb 05

- Started to rise again from Mar 05

Shifts in Govt. Treasury Yield Curve

Challenges

• Absence of effective interest rate structure• Almost no secondary trading of government debt instruments• Weak governance institutions• Overlapping role of the SEC and Bangladesh Bank• Out-crowding effect from bad loan situation • Dominance of NCBs• Cumbersome information system• Insignificant non-banking sector• Absence of arbitration institutions• Low effectiveness of Credit Rating agencies• Absence of SEC guidelines on FIS

Roadmap• Establish benchmarking and long term Yield Curve.• Rationalization of the Interest Rate Structure whereby the Government borrows

at the lowest possible rate to create a level playing field.• Provide a Legal Framework of user friendly Rules & Regulations, conducive to

the creation and development of an active market.• Increase effectiveness of independent Credit Rating Agencies• Develop and strengthen market intermediaries like primary dealers, investment

analysts, investment / merchant banker’s etc.• Expose pension and insurance funds to the debt market.• Facilitate Securitization and issuance of Asset Backed Securities and

Collateralized Loan Obligations.• Improve Central Depositary and Electronics Settlement and Registration

System.• Upgrade Accounting and Disclosure Standards as well as Foreclosure Laws.