Mukti

Bubble trouble

Posted in economics by jrahman on December 21, 2010

Stock market in Bangladesh is clearly showing sharp gyrations.  The question is probably no longer ‘is there a bubble’, rather it’s likely to be ‘how will it burst’?  It’s not just the stock market.  Anecdotally, land prices are also going through the roof. 

And it’s tough for the policymakers, as Ifty Islam, a Dhaka-based investment banker, told the Financial Times’ Amy Kazmin:

It’s a difficult time for the Securities and Exchange Commission.  It’s not just a financial phenomenon, to some extent it’s a political phenomenon.  Many of those stock market investors are first time investors – very new in the market, often buying without much fundamental knowledge, or analysis of what they are buying. They are buying because its going up. But if many of these investors take to the streets, it creates major challenges for the regulators.

So what should the authorities (have) do(ne)? 

The regular reader would note that I’ve been saying for a while that the monetary policy setting is too expansionary, particularly the peg with the dollar is fuelling inflationary pressure.  Ahsan Mansur of Policy Research Institute echoed this in August.*  But he also went futher, suggesting some specific actions.  His recommendations are reproduced over the fold.  They all appear sensible.  I hope the Bangladesh Bank (and other authorities) are listening.

Ahsan Mansur’s recommendations.

  • Increase the risk weights associated with provisioning for lending to stock market to induce banks to reduce their exposures to the market. 
  • The limit on stock market investment by banks may be reduced to discourage bank investment in the capital markets.
  • Margin lending criteria may also be tightened.

Mansur also stressed that Bangladesh Bank together with the SEC should give clear and firm signal against the bubble.  Unfortunately, no signal came earlier, and now it looks like the Bank is panicking.  The coming Monetary Policy Statement should be used to communicate clear resolve. 

Meanwhile, to stop the bubble from spreading into the real estate sector, Mansur suggests capital gains tax on land and withdrawal of scope for money whitening — both are excellent ideas that should be supported in the lead up to next Budget. 

But all that is either what should have been done, or what should be done in future.  What of now?

*AT Capital – PRI Bangladesh Update, 8 Aug 2010.

5 Responses

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  1. twotwo said, on December 23, 2010 at 12:53 am

    bangladesh is the only country in the world, that has a ‘two tk’ note. you are all wise, put the twos together.

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  4. chris said, on January 11, 2011 at 4:08 am

    Excellent article. You mentioned a few corrective measures to curb the inflationary pressures in real estate, such as capital gains tax. Not sure if that will have the intended effect, though. But that’s a discussion for another day. The question I have in mind is if the stock market does actually plunge and stay that way for some time, how will it impact price inflation for food and real estate. If the money leaves the stock market, can we expect that to chase real estate?

    • jrahman said, on January 12, 2011 at 4:31 pm

      I guess a lot would depend on how much is lost and by whom. If bulk of the loss is from the retail investors, then the major consequences would be more socio-political than economic, I’d imagine. To the extent that the affluent folks avoid much wealth loss, it’s possible that the money would flow to real estate. If the banks are affected by a sustained bear market, then that could have whole bunch of other macroeconomic consequences.

      I don’t think food prices will be affected one way or other, unless Bangladesh Bank changes its exchange rate policy.


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