REPORT ON“ Risks in Bangladesh: Field for investment

consideration”

Presented To

Dr. A. A. Mahboob Uddin Chowdhury

Professor

Dept. of Finance

University of Dhaka

Presented ByMd. Raisul Hoque –ID: 23003

Abed Hossain Billah – ID: 23030

Pallab Hossain Tushar – ID: 23016

Md. Mahbubul Hasan – ID: 23028

Md. Mehedi Hasan – ID: 23051

Sajjad Mahmud Shahin – ID: 23027

Presented ByMd. Raisul Hoque

ID: 23003

IntroductionAn MNC conducts Country risk analysis when

assessing whether to continue conducting

business in a particular country. The analysis can

also be used when determining whether to

implement new projects in foreign countries or

not. Country risk can be partitioned into the

country’s political risk and its financial risk.

What in Country Risk

Country-risk analysis is the assessment of the level

of political and economic risk associated with doing

business in another country. Risk analysis is used

when extending credit to foreign buyers making

foreign direct investment decisions.

Overall Factors Consideration in Country Risk

The level of political stability

Regulation of businesses

Protection for private property

Government wage and price controls

Government budgets and deficits

Inflation

Unemployment

Interest rates

Exchange rates

Why Country Risk Important

Country Risk analysis is important for the followingreasons:

Evaluating country risks is a crucial exercise whenchoosing sites for international business, particularlyif investment is to be undertaken.

The study of country risks is also necessary in orderto develop alternative scenarios.

Business managers do not like surprises. Each aspectof country-risk analysis is a potential source ofuncertainty, which can lead to unpleasant surprisesfor anyone doing business abroad.

Md. Mahbubul HasanID# 23028

PRESENTED BY

Attitude of Consumers in the Host Country◦ A mild form of political risk (to an exporter) is a

tendency of residents purchase only locally produced goods. Even if the exporter decides to set up a subsidiary in the foreign country, this philosophy could prevent its success. All countries tend to exert some pressure on consumers to purchase from locally owned manufacturers. If consumers are very loyal to local products, a joint venture with a local company may be more feasible than an exporting strategy.

Attitude of Consumers in the Host Country (Bangladesh Perspective)◦ the consumers usually associate the price of the

brand with its quality, a brand priced too low is generally perceived as a low quality product. Consumers of Bangladesh have the tendency towards those attributes to have the favoritism to use the foreign products rather than to use Bangladeshi products as patriotism.

Attitude of Consumers in the Host Country (Bangladesh Perspective)

A research was conducted that contained the question about using international brands products in two groups: male and female. The response of them has presented graphically:

Attitude of Consumers in the Host Country (Bangladesh Perspective)

Another question was in that study about the preference of foreign or

domestic brands having same prices. Still there the fondness about foreign brand revealed strongly. The result is shown in followings:

Attitude of Consumers in the Host Country (Bangladesh Perspective)

Ranks Phones Manufacturing Country

1 Nokia Finland

2 Samsung South Korea

3 Apple USA

4 Sony Ericsson Japan

5 HTC Taiwan

6 Blackberry Canada

7 LG South Korea

46 Walton Bangladesh

Actions of Host Government◦ Tax and Tariffs

◦ Pollution control standards

◦ Withholding taxes and fund transfer restriction

Actions of Host Government (Bangladesh Perspective)

Fiscal Incentives Non-Fiscal Incentives Infrastructure & FacilitiesTax holiday for 10 years 100% equity allowed Fully serviced plots Concessionary tax for 5 years after completing initial 10 years Unrestricted exit policy Ready factory building Duty free import of machinery & raw materials

Full repatriation facilities of dividend and capital at the event of exit All types of utilities

Avoidance of double taxation based on DTTs

Import of raw materials allowed on Documentary Acceptance basis

Warehouse and Secured Bonded Area

Intra and Inter Zone export is allowed Business Support Services Subcontracting within EPZs permitted Administrative services

Customs clearance at Plant Site Workers dormitory enclave

Recreational amenities

Actions of Host Government (Bangladesh Perspective)

45%

20%

34%

25%

30%

25%

15%

5%

35% 35%

Corporate Tax Rates

Actions of Host Government (Bangladesh Perspective)

Bangladesh China Pakistan India Sri-Lanka Vietnam

15%

10% 10%

0%

10%

0%

Withholding Tax Rate

Actions of Host Government (Bangladesh Perspective)

40%20.10% 28.80% 18.50% 13.80%

463%

Import Taxes Tariff Agricultural Tariff Non- Agricultural

Tariff

Customs Duty Luxury Items

Rates of Tariffs & Quotas (Maximum)

Blockage of Fund Transfers◦ Subsidiaries of MNCs often send funds back to the

headquarters for loan repayments, purchases of supplies, administrative tires, remitted earnings, or other purposes.

Blockage of Fund Transfers (Bangladesh Perspective)◦ FDI related outward remittances, 1995-

2005(calendar year) (In Million USD)

Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Dividend/Profit

Repatriation19 18 26 40 83 149 175 195 355 338 418

Inv. liquidation/ 0.3 - 0.6 0.1 2.9 0.5 0.5 2.6 2.2 10.5 3.3

Cap. Repatriation

Private Debt

amortization20 34 84 53 168 227 188 243 229 372 208

Family Maintenance 0.99 0.74 1.41 1.56 1.92 2.43 1.84 2.82 4.19 4.72 2.58

Total Outward flow (a) 40.29 52.74 112.01 94.66 255.82 378.93 365.34 443.4 590.4 725.2 631.9

Gross FDI inflow

including106.3 267.6 610.3 668.5 455.1 703.6 568.5 573.3 466.2 545.4 927.3

private outside loan (b)

Net Inflow/ Outflow 66.01 214.9 498.29 573.84 199.28 324.67 203.16 129.9 -124 -180 295.4

Currency Inconvertibility◦ Some governments do not allow the home currency

to be exchanged into other currencies. Thus, the earnings generated by a subsidiary in these countries cannot be remitted to the parent through currency conversion. When the currency is inconvertible, a MNC’s parent may need to exchange it for goods to extract benefit from projects in that country.

Currency Inconvertibility (Bangladesh Perspective)◦ The Taka is fully convertible for current account

transactions.

◦ Bangladesh Bank, the central bank of Bangladesh, does not fix the exchange rate against foreign currencies, but it regulates conversion.

◦ The central bank's exchange control regulations and the U.S.-Bangladesh Bilateral Investment Treaty (in force since 1989) provide similar investment transfer guarantees.

Relationship with neighboring countries

Internal Conflicts –BD experienced internal and political turmoil 4-5

times after Independence War 1971 like 1975,1981, 1990 and 2007

Bangladesh economy suffered a loss of $1.4billion due mainly to election-related politicalunrest

reduce the growth rate from the 6.2 percent to5.4 percent

86%

11%

3%

Total Loss suffered by BD Economy for

Political Unrest in 2014

Service : Tk. 1.204

billion

Industry: Tk. 0.154

billion

Agriculture: Tk. 0.042

billion

Source: Bangladesh Bureau of Statistics (BBS)

Presented ByMD. MEHEDI HASAN

ID No. 23051

Lack of Restrictions

“Copyright Laws”

Local firms in Asia commonly copy software produced by MNCs and sell it to customers at lower prices.

Bangladesh positions itself at 125th out of 129 countries (in terms of Intellectual Property protection)

The piracy rate in Bangladesh for sound recordings & book publication is close to 100%

Lack of Restrictions (Cont…)

The piracy rate in the CD sector is 100% for regional (Indian) and international repertoire, and 85% for local repertoire.

Repertoire sold on cassettes is 80% Indian (Hindi), 16% Bangladeshi and 4% international

The music piracy market value in Bangladesh stands at US$ 180 million (11 times higher than India).

Lack of Restrictions (Cont…)

Source: International Property Rights Index 2013 Report

Bureaucracy

Government bureaucracy can complicate a MNC’s business.

Reasons –Lack of accountability, responsiveness transparency and flexibilityExcessive hierarchyPoliticization

Issues of fairness, social equity, socialjustice, and ethics are critical in publicadministration

Bureaucracy (Cont…)

Table: Problems of Bangladesh Public Service Commission (PSC) in different periods

Source: Research by Kawsher Ahmed on “ Politics- Bureaucracy Relationship in Bangladesh.”

Corruption MNC may loss revenue because a government contract is

awarded to a local company by taking bribe.

By some estimates of BBS, bribes & off-the-record payments by firms may result in annual losses of 2%–3% of national GDP.

63.7% of the households of Bangladesh have been victims of corruption (According to national household survey 2012)

Paid Tk 2, 19,556 million annually as unauthorized payment, which is 13.4% of the national budget of 2012-13 fiscal year and 2.4% of the GDP

53.3% of total households who received services from the service sectors paid bribe and unregulated money

Corruption (Cont..)

Source: Annual Household Survey 2013

Corruption (Cont..)

Source: Annual Household Survey 2013

Table: Rate & amount of unauthorized payment of different service sectors in BD

Corruption (Cont..)

Source: Corruption Perceptions Index (CPI) Report

Table: Corrupted countries according to CPI and their ratings including Bangladesh

Corruption (Cont..)Source: Corruption Perceptions Index (CPI) Report by TI

PRESENTED BY

ABED HOSSAIN BILLAH

ID: 23030

FINANCIAL RISK FACTORS The possibility that shareholders will lose money when they invest in a company that has debt, if

the company's cash flow proves inadequate to meet its financial obligations.

Financial risk also refers to the possibility of a corporation or government defaulting on its

bonds, which would cause those bondholders to lose money.

Financial risk refers to the risks that businesses run when making investments, planning for the

future and conducting day-to-day operations. All businesses run some risk in making financial

decisions.

1. Some of these risks are external, depending on outside factors and decisions made by

other organizations and consumers.

2. Other risks are internal and deal with the possibility that the strategies and actions the

business leaders choose may have negative effects on operations.

ANALYSIS OF FINANCIAL RISK FACTORS OF BANGLADESH

Interest Rates of Bangladesh

In May 2014 Bangladesh Bank defined risk free rate is 5%. For call money for both the borrowing and lending ratewere 6.5%. For the scheduled banks the interest rates on Deposits was 8.01% whereas rates on advances was13.23% where the Spread was 5.22%. The following table represents the relative interest rates of Bangladeshwith some developing countries and South Asian countries.

Source: Wikipedia

Country Last Previous Highest Lowest

Afghanistan 15.00 15.00 21.00 12.00

Bangladesh 7.25 7.25 8.75 4.50

Bhutan 6.00 6.00 6.00 6.00

China 6.00 6.00 10.98 5.31

India 8.00 8.00 14.50 4.25

Indonesia 7.50 7.50 12.75 5.75

Iran 14.15 14.15 19.00 10.00

Malaysia 3.25 3.00 3.50 2.00

Maldives 7.00 7.00 7.00 4.46

Myanmar 10.00 10.00 12.00 10.00

Nepal 8.00 8.00 8.00 5.50

Pakistan 10.00 10.00 20.00 7.50

Sri Lanka 6.50 6.50 10.50 6.50

Vietnam 6.50 6.50 15.00 4.80

COMPARATIVE TO THOSE COUNTRIES BANGLADESH’S INTEREST RATES

ARE NOT SO HIGHER NOT SO LOWER. INTEREST RATE PLAYS AN

IMPORTANT ROLE IN AN ECONOMY. THIS TENDS TO SLOW THE GROWTH

OF AN ECONOMY AND REDUCE THE DEMAND FOR THE PRODUCTS OF

MNCS. BANGLADESH’S INTEREST RATES ARE COMPARATIVELY LOWER IN

THE JANUARY 2014 THAN JANUARY 2013 .

Call MoneyBorrowings Rates

Call Money LendingsRates

Scheduled BankDeposits Rates

Scheduled BankAdvancess Rates

Spread

7.17% 7.17%8.40%

13.39%

4.99%

10.29% 10.29%

8.60%

13.73%

5.13%

19.66% 19.66%

7.86%

13.49%

5.63%

Interest Rates in Different Times

Jan-14 Jan-13 Jan-12

EXCHANGE RATES SYSTEM IN BANGLADESH

Exchange rates of Taka for inter-bank and customer transactions are set by the dealer banks, based on

demand-supply interaction. . Bangladesh Bank (BB) is not in the market on a day-to-day basis, and undertakes

USD purchase or sale transactions with dealer banks at prevailing inter-bank exchange rates only as needed to

maintain orderly market condition.

Upon Bangladesh's independence, the value of the Bangladeshi taka was set between 7.5 and 8.0 to US$ 1

With the exception of fiscal year 1978, the taka's value relative to the US dollar declined every year from

1971 through the end of 1987

Between 1980 and 1983, the taka sustained a decline of some 50 percent because of deterioration in

Bangladesh's balance of payments. Between 1985 and 1987, the taka was adjusted in frequent incremental

steps, stabilizing again around 12 percent lower in real terms against the United States dollar., , but at the

same time narrowing the difference between the official rate and the preferential secondary rate from 15

percent to 7.5 percent. Accompanying this structural adjustment was an expansion in the amount of trade

conducted at the secondary rate, to 53 percent of total exports and 28 percent of total imports.

GENERALLY BANGLADESH MANAGES EXCHANGE RATES SYSTEM IN THE FREE FLOAT

SYSTEM. BANGLADESH ALWAYS TRIED TO WEAKEN THE VALUE TAKA AGAINST US

DOLLAR TO COMPENSATE THE EXPORTERS. THIS REDUCED THE APPEALING OF FOREIGN

INVESTORS.

BANGLADESH EXCHANGE RATES FLUCTUATION AGAINST DOLLAR OVER TIMES

REPRESENTED BELOW WITH GRAPH.

Source: Bangladesh Bank Statistical Department.

ALTHOUGH BANGLADESH HAS BEEN FOLLOWING THE WEAKEN OF TAKA AGAINST

DOLLARS SINCE 1971 IN LAST TWO YEARS TAKA VALUE INCREASED AGAINST

DOLLAR. THIS WILL CREATE POSITIVE IMPACT IN FOREIGN INVESTMENT IN

BANGLADESH IF THE POLICY CONTINUES. THE LAST FOUR YEARS FLUCTUATION

OF TAKA AGAINST DOLLAR IS STATED BELOW WITH A GRAPH.

69.2271.15

84.45

79.21

77.75

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Rates of Taka against dollar in last five years

INFLATION RATES OF BANGLADESH

Inflation rate was 7.48% in May 2014 slightly increased from the previous month. In April 2014, it t was 7.46%.

Overall inflation in 2014 decreases from the previous year. In May 2013 the inflation was 7.98%. Higher inflation

tends to increase the possibility of foreign investment while others are constant.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Ma

y-1

0

Ju

l-1

0

Sep

-10

Nov-1

0

Ja

n-1

1

Ma

r-11

Ma

y-1

1

Ju

l-1

1

Sep

-11

Nov-1

1

Ja

n-1

2

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r-12

Ma

y-1

2

Ju

l-1

2

Sep

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Nov-1

2

Ja

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3

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Ma

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3

Ju

l-1

3

Sep

-13

Nov-1

3

Ja

n-1

4

Ma

r-14

Ma

y-1

4

Inflation Rates in Five years

HOWEVER BANGLADESH HAS A QUITE HIGH INFLATION RATES THAN MOST OTHERS SOUTH

ASIAN COUNTRIES.

THE INFLATION RATES IN SAARC COUNTRIES ARE SHOWN IN THE FOLLOWING GRAPH.

4.50%

7.50%

8.30% 8.30%8.80%

11.40%

12.80%

10.20%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Inflation Rates in SAARC countries

Presented BySajjad Mahmud Shahin

ID: 23027

Checklist approach.

Delphi Technique.

Quantitative analysis.

Inspection visits.

Combination of techniques

Rating Assigned to Factor(within a range of 1-5)

Weight Assigned to FactorAccording to Importance

Weighted Value of Factor

Political Risk Factors

Attitudes of the Consumers in theHost Country

4.5 10% 0.45

Actions of Host Government 4 15% 0.6

Lack of Restriction 1 5% 0.05

Blockage of Fund Transfers 5 15% 0.75

Currency Inconvertibility 4 10% 0.4

War and Political Turmoil 0.5 15% 0.075

Bureaucracy 1 15% 0.15

Corruption 0.25 15% 0.0375

Political Risk Ratings 100% 2.5125

Financial Risk Factors

Interest Rates 3.5 35% 1.225

Exchange Rates 2.75 30% 0.825

Inflation Rates 4 35% 1.4

Financial Risk Ratings 100% 3.45

Ratings of Bangladesh Evaluating all factors

Category Ratings as

Determined

Above

Weight Assigned

to Each Risk

Category

Weighted Ratings

Political Risk 2.513 75% 1.8844

Financial Risk 3.45 25% 0.8625

Overall Country

Risk Rating

100% 2.7469

After all qualitative and quantitative judgment andanalysis of the information in the practical partBangladesh has acquired the score for country risk2.7469 which can be said that moderate. That meansBangladesh has the moderate risk in foreigninvestment era for MNCs and foreign investors.

Thanks