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2008, a steady year for the taka

Star Business Desk
While the world currency market is still recuperating from the shock of the US subprime crisis, the taka showed impressive stability as it remains broadly steady at 68.50-69.50 per dollar through out the year. Though import growth outpaced export, record high home remittance eased the pressure, causing die rate to move within a limited range. The central bank supported the market all year round by managing liquidity time to time. Import growth has been I 25.63 percent in fiscal 2007-08, against export growth of 15.7 percent. But remittance grew by 32 percent to $7.9 billion, tagging a positive figure to the balance of payments. Aid and grants also increased 75 percent.
Though die taka stood out of the league showing strong character against the dollar, other currencies in the region, such as the Pakistani Rupee (PKR) and the Indian Rupee (INR), lost ground against the greenback. During the yearend. the INR stood at 48.8 per dollar, down around 24 percent, while the PKR was down 28 percent from January to the 78.80 level.
Non-US majors, the euro and the sterling, were extremely volatile against the taka in tandem with their volatility against the US currency. The euro went up to Tk 111 in the middle of July and came as low as Tk 88 in the middle of November, before bouncing back to Tk 100. The British pound (GBP) went up to Tk 141 in March but | went down as low as Tk 103 in November 2008.
The world FX market witnessed extreme volatility in 2008. In the middle of the year, major non-US currencies were at a record high against the dollar (the euro touching almost 1.6 level while the sterling was close to 2.03 level) as US took the first hit on confidence from the subprime mess. But following the financial market crisis, confidence in those currencies was deeply disturbed since recession spread in all other major economies.
The market charted a sharp . correction in all major currencies like the euro and the pound, since fund managers started buying the dollar to keep cash as assets, withdrawing investment from major investment vehicles, resulting in high demand for the dollar, which kept the dollar relatively strong against other major currencies.
The euro was record high in the middle of the year at $1.6, but lost its strength and went below $1.25 in November. The GBP exhibited a similar fall from above $2 to below $1.5 in December, against the greenback. But to re-ascertain the fact that the currency market is never out of excitement and sur-. prises, the US currency responded ^Vith a sharp gain in the second last week of December, after the US government said it will provide loans to Detroit carmakers crippled by the economic downturn. The dollar moved to $1.47 a euro on December 18, the weakest level since late September, before coming down to $1.40. The Bank of Japan's interest rate cut to nearly zero, also lent support to the greenback. The euro also lost ground after the European central bank
secondary bond trading activities.
The central bank's initiatives to activate a deep secondary market for government bills and bonds started to see results in 2008 with significant rise in secondary trading led by PD banks and some other non-PD banks. There is now a widespread understanding of bond trading dynamics and settlement processes among the banks.
The central bank continued to publish semi-annual monetary policy statements adapting accommodative monetary stances. To keep inflation under control, the central bank repo rate (the rate at which the central bank lends money to banks) and reverse repo rate (the rate at which banks park surplus liquidity with the central bank) were increased to 8.75 percent and 6.75 percent from 8.5 percent and 6.5 percent respectively. In order to further boost secondary trading of government securities, issuance of 28 days treasury bills were discontinued.
The neighboring countries like India, Pakistan and Sri Lanka experienced a volatile interest rate environment in 2008 as the governments tried to control inflation.
said that it would reduce the interest rate, eroding the appeal of the euro-zone currency.
Bangladesh money market
The local money market experienced some volatility in 2008. The market remained calm in 2007, contributed by surplus liquidity in the system. The scenario started to change from the third week of January 2008, when call money rates started to rise. The central bank acted prudently and injected liquidity into the system, which helped stabilise the market. Call rates hovered mostly between 7 percent and 15 percent in 2008 compared to 6.5 percent and 9.5 percent in 2007.
To ensure adequate liquidity in the market, Bangladesh Bank (BB) used the repo route (allows banks to borrow the taka against government approved securities) and also bought back government bills and bonds that were sold earlier. The continuous liquidity support allowed banks to manage funding and help credit growth in the economy. In addition, primary dealer (PD) banks were comfortably able to fund the securities that were devolved on them and pursue
Statutory reserve requirements were changed and liquidity flow in the system controlled. There were, however, no changes in reserve requirerrtents for banks operating in Bangladesh. Both CRR and SLR were kept unchanged at 5 percent and 13 percent, respectively.
The government securities yield curve experienced a moderate upward shift for 91, 182 and 364 days tenors. Yield on longer tenor bonds of 5, 10, 15 and 20 years decreased in Hl before stabilising in the second half of the year.
Further transparency was brought in the classification of securities under the HTM and HFT portfolios and MTM revaluation of securities by the BB. However, interbank repo and reverse repo transactions were limited to only 7 days, compared to no restrictions previously.
Initiatives were also taken by market participants, led by Bangladesh Foreign Exchange Dealers' Association (BAFEDA), to have a market driven yield curve, similar to other developed markets like the London Interbank Offered Rate (LIBOR). The Dhaka Interbank Offer Rate (DIBOR) is
expected to be available in 2009. Globa) Markets
The global economy has faced a severe financial crisis in 2008. All began with the bursting of the US housing bubble and high defaults on sub-prime and adjustable rate mortgages, beginning in 2005-06. But 2008 was tormented badly when the after effects of the crisis started to create dents in almost every corner of the financial world. In 2008, defaults and the declining housing industry eventually resulted in world wide economic crisis leading many countries to recession or negative growth; the list includes the US, Japan, Hong Kong, Singapore and the European Union countries that uses the euro as a whole. If all those countries stay in recession, then, among the seven largest economies in the world by GDP, only China and France could avoid a recession for the time being.
Credit Market
The credit market was the most direct victim of the subprime crisis in 2008. Many factors are responsible for creating the crisis, but the most immediate causes were a rising interest rate environment.
People with adjustable rate mortgages had to see significant increases in their mortgage payments, and declining property values as the US real estate market eventually began making adjustments. This made many real estate owners unable and, in many cases, Unwilling to meet financial commitments. As a result, lenders without means to recoup their losses started threatening the solvency of a number of marginal private banks and other financial institutions.
The impact of the meltdown went beyond real estate industry and disrupted global financial markets. It caused extreme volatility in the fixed income, equity, and derivatives markets. The crisis was multiplied and went beyond the US through complex credit derivative products, which were structured based on sub-prime mortgage receivables. Perceived credit risk rose, liquidity became tighter than ever before. And the market experienced the biggest accumulated write-off in the financial sector.
In January, the year started with Citi Group's writing down of $18 billion, which crossed $33 billion
in the course of the year. The Federal Reserve System reacted with a scries of prompt rate cuts with a hope to manage the crisis. UBS and HSBC booked losses of $35 billion and $17 billion respectively and the scenario worsened when the Bear Stearns collapsed. Central banks injected $200 billion of liquidity into markets. JP Morgan and Fed moved to bail out Bear Stearns in March while the US treasury backed regulatory overhaul. This was followed by Citi group's sale of $3 billion (revised value of $4.5 billion) of stock to boost capital. Citigroup winded down $400 billion in assets in May.
Towards the end of May, UBS falls after saying more mortgage losses possible. Freddie Mac and Fannie Mae plunged on capital concerns. In the middle of September, Lehman filed the biggest bankruptcy after suitors balk. On the other hand, the Bank of America acquires Merrill as crisis deepens. Fed widened collateral; banks set up $70 billion of funds and lends $85 billion to AIG taking 80 percent stake. LloydsTSB sealed sterling 12.2 billion on HBOS deal and B7B, Glitnir, Dutch part of
Fortis got nationalised. The total loss instigated from the sub-prime crisis is threatening to reach a trillion dollar figure.
Towards the end of December, The Federal Reserve opened a new era in US monetary history, cutting interest rates to as low as zero and pledging to buy unlimited quantities of securities, after conventional policies failed to arrest what may be the worst recession since World War II.
The new strategy is likely to involve unusually close cooperation with the treasury of Presidentelect Barack Obama, which is still formulating its economic-rescue plans. The aim is to kick-start borrowing and spending to propel the economy towards recovery by the middle of next year.
Commodities Markets
The current decade saw a commodities boom, in which the prices of primary commodities rose again after the late-twentieth century commodities recession of 1980-2000. In 2008, the prices of many commodities rose record highs during the first half of the year to cause genuine economic damage, threatening stagflation and a reversal of globalisation. But in the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession and a relatively stronger dollar.
In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many milestones to be passed in the course of the year. Oil prices continued to rally upward and approached $150 a barrel level in July. Prices were pushed higher fueled by geopolitical factors, the weaker dollar, supply concerns, and suggestions that OPEC might agree to cut output. On July 15, a sell off began after remarks by the FED Chairman Ben Bernanke, which indicated significant demand destruction within the US because of the high prices. Prices have dropped 73 percent to below $40 in just four months from a record $147.27 on July 11.
The precious metal gold reached a record $ 1,032.7 an ounce in March, but slid down to below $ 700 level at a point. As of 23rd December, gold is trading at $842 an ounce.
In 2008, prices of most of the agricultural commodities passed through similar movements - went on to touch the roof and then diving down towards the floor, which has been the impact of the overall economic slowdown. Wheat CBOT index crossed the 1200USc/Bushel level in the first half of the year whereas in the second half of the year, prices went below 600 USc/bushel level. Corn price (CBOT near future USc/bushel) crossed 750 level in the first half and went down towards 300 level in the December. Price of rice had similar movement, US rough rice CBOT index touched $500 tonne and moved towards $300 tonne level. Edible oils also followed the same pattern on the graph. The main trigger for the decline in agricultural commodity prices is market concerns about the sluggishness of the US and global economy and its impact on longer-term demand prospects for the feed industry.
Source: Standard Chartered