Disclosure: The article was written on Wednesday, March 16, 2011 at 11:36am. It reflects the writer's personal opinions based on own analysis. The writer is not responsible for decisions taken on the basis of this article. Send your views at kh.asif@gmail.com.
This writeup is definitely not one of my better pieces. I wrote it in a hurry because I think that raising awareness on this issue is a must. So please forgive any mistakes and errors.
Background
Instead of going after valid issues like insider trading, price/volume manipulation, monitoring and compliance we seem to go after the wrong issues. I am basically referring to the plan to use “share buyback” as a way to ensure that stock prices do not remain “undervalued”. How does this work? Basically, when a company feels that its stock is trading below fair value it uses its own cash to buy back shares. It is easier to think that share buyback is similar to paying cash dividend because the company pays cash to existing shareholders to buy the shares.
Share buybacks are allowed in many countries of the world and particularly developed countries. However, that does not mean that it has to be adopted in Bangladesh as well. In fact, given the current condition of our economy and market I think that it will be a big mistake to allow share buyback. This is my preliminary response to the idea and I will hopefully write more after I get the final copy of the guideline in hand.
Reasons
I will try to be very specific on the reasons I am going to cite.
1. A new method of stock price manipulation: Once legalized, company management and sponsors will now be free to use the rumors and news of stock buyback to increase stock prices. Now since it is going to be legalized the manipulators would not face any problem whatsoever.
Let me give an example. When the seller knows that there is a ready buyer for the stock, the seller will be able to hike prices. Given the highly speculative nature of our market this is going to be a ticking time bomb where retail investors will once again fall prey to the schemes of the manipulators. This will be the new fad after bonus shares, rights shares and stock splits all of which led to unjustified increase in stock prices.
2. Objective of capital market: A developing country like Bangladesh needs to invest a lot for growth. Capital markets are created primarily because entrepreneurs can raise funds for investment. When we are allowing buy backs we are basically doing the reverse. Companies will be giving back money to the shareholders. This is definitely counter intuitive. When most of the companies are unable to give decent dividend yields how would they be able to buy back shares? One way may be to use leverage which makes things even worse. Already our capital market is heavily leveraged and the banks are going to pay a price for that. We really cannot afford to increase leverage any more.
3. Supply of shares would decline: It is common knowledge that we have lack of supply of quality shares. Now if companies start buying back own stock we are actually decreasing supply rather than increasing it. How that helps is a big question mark.
4. Focus to be diverted away from operations towards financing activity: Allowing buyback will definitely divert attention of management and the directors towards financing activities instead of trying to improve operational capabilities. These days everybody is trying to get rich in the shortest possible time which is why we see manufacturing companies investing in the capital market. This is highly detrimental for the country as resources are not being used for productive purpose but rather for speculative purpose.
5. Who has the necessary cash balance?: The only companies who should go for buybacks are companies with huge ‘net cash’ position which are unable to use that money for productive purpose. Thus there should be a clear guideline on who can go for buy back. Like I already mentioned, leveraged must not be allowed at any cost to buy back shares. Now if we look at the listed companies there are only a handful of companies who has the required balance sheet strength to buy back. I am quite sure that once the buyback rule is passed its going to be the companies with the weaker fundamentals that will use it rather than the ones who should go for buyback.
6. What are the penalties for violating rules?: My last concern is violation of the buyback rules. This is a sensitive thing and involves huge amount of money. Thus violation of buy back rules must be penalized with hefty punishment like imprisonment. I guess the penalty aspect would be clearer once the final copy of the law is out.
Conclusions
Instead of focusing on complex things like buybacks, we should use this time to work on the basics first. The priorities in my opinion are
1. Strong insider trading laws: Insider trading is rampant in our market where everybody seems to know earnings and corporate declarations much before the company announces them. This is the biggest evil right now.
2. Preventing price and volume manipulation: This is the second biggest problem. Syndicates corner shares and then start spreading rumors. In finance terms this is called “pump-and-dump”. We need to stop this.
3. Corporate governance and transparency: No need to elaborate on this. In terms of corporate governance and financial transparency we fall far behind compared to most neighboring countries.
4. Bonus shares/Splits: It is high time that investors realize that bonus shares do not mean anything. They don’t add any value to the company and thus should not increase stock price.
Wednesday, March 16, 2011
Saturday, March 5, 2011
Whose money are we spending?
As per statistics the Bangladesh economy has been growing at a rate of 6% (Real) on average per year. Even though statistics are always a debatable issue it seems from indicators of people’s new found affluence and wealth that real incomes have indeed grown by 6% (or even more).
With rising incomes (on an aggregate basis) we are also seeing other factors coming up. One is the rise of “consumerism” and the other is “increasing inequality”. Let us talk about the former first. To prove this I do not need to work very hard. The signs are everywhere. Even though car taxes have been increased significantly I do not see any slowdown in car sales. Apartment prices have increased but sales did not slow down. Expensive tickets of dance shows that feature foreign artists are “sold out” instantly. How are people affording these things despite the high prices attached? The answer is very simple. These consumers represent a small portion of the population having a large portion of the wealth. It does not really matter to them whether prices have doubled or quadrupled. They can afford it.
On the contrary there is this other group (which off course represents the vast majority of the population) who are having a hard time to simply gather food and lodging. As per ILO’s Global Wage Report 2010/2011 the real average monthly minimum wage in Bangladesh has been on the slide, although its annual rate of fall had increased from -7.2 per cent in 2008 to -5.7 per cent in 2009. These people are seeing their purchasing power and living standards fall continuously.
I don’t think it requires any explanation to show that the rich are actually getting richer because of the sacrifices of the vast majority of the country’s people which includes the minimum wage workers, remittance earners and the farmers. Problem is GDP growth through inequality does not help the country but rather helps a particular group of people. Both governance systems as well as religious systems have acknowledged this issue and had tried to find ways to solve inequality. Governments try to do it by taxing the rich and providing safety nets for the poor. Religions (like Islam for e.g.) have a system of ‘Zakat’ and ‘Fitra’ which ensures that inequality is reduced. Unfortunately, most of us neither pay taxes properly nor pay ‘Zakat’ properly. Furthermore, because of corruption the tax that is paid by honest tax payers are also not utilized properly and thus these groups are being deprived even more.
A person like me can go out and spend my money as I wish thinking that it is my earnings. But when I look closely I need to remember that while economy is growing some people are being worse off. This indirectly suggests that there are people whose efforts led to my increased wealth.
The case becomes even stronger when we think of imported goods. When people become rich somehow they start wanting goods of higher quality and status (basically I am talking about imported goods). Let me use the example of a luxury car which people are buying even after paying 600% tax. Apart from the duty the actual import cost is paid in dollars. Thing is the importing consumer did not earn the foreign currency. “It is our migrant workers working and toiling away in far away countries away from their families (and presently risking their lives) who earned it”. You might say that we do earn foreign currency through exports but please remember that we have a trade deficit. Along with export earnings we do have associated import costs of raw materials and capital machinery. So, imported goods are bought using the migrant workers toils. Now tell me whether we give these guys their due respect for working so hard and being one of the major growth factors of our country. We don’t. Instead they are harassed, cheated and deprived.
Its now time to ask ourselves the very basic question “whose money are we spending?”. Relying on our government to reduce inequality is going to be futile. We ourselves have to find out ways to help solve this problem. I do not have a solution right now but I am going to try to find ways. Inequality harms the long term growth prospect of countries. This has been realized by the second largest (and fastest growing) economy in the world. China has already decided that they will lower growth expectations for 2011-2015 to 7% from their current double digit growth rates and instead focus on equality. Instead of focusing on exports they want to go for internal demand lead growth, which is only going to be possible by reducing the rich poor gap. Given the current state of the global economies where we are seeing shocks after shocks, as well as inevitable fiscal austerity programs (Europe started it already while US will go for it from 2013) this is probably the right way Bangladesh should move towards.
Please share article if you have liked it.
With rising incomes (on an aggregate basis) we are also seeing other factors coming up. One is the rise of “consumerism” and the other is “increasing inequality”. Let us talk about the former first. To prove this I do not need to work very hard. The signs are everywhere. Even though car taxes have been increased significantly I do not see any slowdown in car sales. Apartment prices have increased but sales did not slow down. Expensive tickets of dance shows that feature foreign artists are “sold out” instantly. How are people affording these things despite the high prices attached? The answer is very simple. These consumers represent a small portion of the population having a large portion of the wealth. It does not really matter to them whether prices have doubled or quadrupled. They can afford it.
On the contrary there is this other group (which off course represents the vast majority of the population) who are having a hard time to simply gather food and lodging. As per ILO’s Global Wage Report 2010/2011 the real average monthly minimum wage in Bangladesh has been on the slide, although its annual rate of fall had increased from -7.2 per cent in 2008 to -5.7 per cent in 2009. These people are seeing their purchasing power and living standards fall continuously.
I don’t think it requires any explanation to show that the rich are actually getting richer because of the sacrifices of the vast majority of the country’s people which includes the minimum wage workers, remittance earners and the farmers. Problem is GDP growth through inequality does not help the country but rather helps a particular group of people. Both governance systems as well as religious systems have acknowledged this issue and had tried to find ways to solve inequality. Governments try to do it by taxing the rich and providing safety nets for the poor. Religions (like Islam for e.g.) have a system of ‘Zakat’ and ‘Fitra’ which ensures that inequality is reduced. Unfortunately, most of us neither pay taxes properly nor pay ‘Zakat’ properly. Furthermore, because of corruption the tax that is paid by honest tax payers are also not utilized properly and thus these groups are being deprived even more.
A person like me can go out and spend my money as I wish thinking that it is my earnings. But when I look closely I need to remember that while economy is growing some people are being worse off. This indirectly suggests that there are people whose efforts led to my increased wealth.
The case becomes even stronger when we think of imported goods. When people become rich somehow they start wanting goods of higher quality and status (basically I am talking about imported goods). Let me use the example of a luxury car which people are buying even after paying 600% tax. Apart from the duty the actual import cost is paid in dollars. Thing is the importing consumer did not earn the foreign currency. “It is our migrant workers working and toiling away in far away countries away from their families (and presently risking their lives) who earned it”. You might say that we do earn foreign currency through exports but please remember that we have a trade deficit. Along with export earnings we do have associated import costs of raw materials and capital machinery. So, imported goods are bought using the migrant workers toils. Now tell me whether we give these guys their due respect for working so hard and being one of the major growth factors of our country. We don’t. Instead they are harassed, cheated and deprived.
Its now time to ask ourselves the very basic question “whose money are we spending?”. Relying on our government to reduce inequality is going to be futile. We ourselves have to find out ways to help solve this problem. I do not have a solution right now but I am going to try to find ways. Inequality harms the long term growth prospect of countries. This has been realized by the second largest (and fastest growing) economy in the world. China has already decided that they will lower growth expectations for 2011-2015 to 7% from their current double digit growth rates and instead focus on equality. Instead of focusing on exports they want to go for internal demand lead growth, which is only going to be possible by reducing the rich poor gap. Given the current state of the global economies where we are seeing shocks after shocks, as well as inevitable fiscal austerity programs (Europe started it already while US will go for it from 2013) this is probably the right way Bangladesh should move towards.
Please share article if you have liked it.
Wednesday, March 2, 2011
Real heroes of Bangladesh: Part 1
Disclosure: This article is not meant to show how great a person I am. I am a human being full of flaws and mistakes and this is my way to pay back some people who deserve praise. Please ignore the grammatical mistakes since I do not feel like rechecking.
Foreword
This is not going to be a really organized post. I just felt like writing something about deprived people and did not feel like collecting any data to back up the claims I am going to make. Most of the claims will be based on logic.
Before I go into the topic I want to talk a bit about myself. I am a member of the privileged class. I studied in an English Medium school and a private university because my parents could afford it (they did have difficulty and I am grateful for the education I got). But frankly speaking, if I had not received this education and had been born in a poorer family I might have ended up in the streets. It is required that people like me acknowledge that we are lucky and that we have a responsibility towards specific groups of people.
The farmers of Bangladesh
The people I want to talk about first (next parts will hopefully focus on other groups including remittance earners and workers with minimum wages) are the farmers of Bangladesh. Bangladesh is about 90% (this is just a guess) self sufficient in rice production. This is definitely a big achievement considering the land area and the total population of the country. Food is a necessity and the simple fact that we are almost self sufficient in food production has saved the country from huge macroeconomic shocks. One interesting thing about economics is somehow everything is linked. Just because of food self sufficiency I can think (If I had time I could possibly expand this list) of the following factors
1.Lower inflation: This can be proven very easily. Firstly inflation rates in Bangladesh are still single digit whereas in neighboring India and Pakistan it is much higher. Another method would to compare PPP prices of rice amongst these countries.
2.Fx reserves: We are not having to import too much rice and hence we are not losing Fx reserves. That foreign currency is being used to import raw materials, capital machinery and luxury goods.
3.Food security: The world is currently going through a tough phase. A country dependent on others for imports can easily face a situation where no one wants to export food. We have been able to avoid that problem largely.
How they are losing out (the common factors)
The problem with farmers is that when production suffers due to weather problems (or any other factor) they make losses as they cannot recover their investments. However, the same problem is again seen when they have bumper harvests. In such times also product prices fall below their costs. So either way they lose. Together with this consider the margin that is stolen by the middle men. All this is common knowledge and all of us know it. The farmers themselves know it but since they were not born in the privileged society they have to live with these problems.
What did we miss?
There are however some other factors that we did miss. Central banks usually keep target inflation rates of around 4-7%. However, inflation rates frequently cross these targets. In such periods there are people who cannot pass on the increased cost of living by increasing product prices. While I do not have backing data on this, I am quite sure that farmers lose out in inflationary scenarios. The only way they can survive is by consuming less. I read numerous news of farmers in India committing suicide because they could not bear any more losses. The funny this is that because of the monetary system that central banks run, money supply will continuously increase and inflation will continue to happen.
In this same line of thought let me talk a bit about “inflation tax”. Like most countries in the world Bangladesh has been running budget deficits. Some of the deficit was there because the government had to improve the infrastructure, provide security, healthcare and education etc. However deficits are also increased by corruption and inefficiencies. Deficits are increased by state owned institutions that run at losses (due to greedy people). Deficits are increased by government’s bailing out of the stock market and failed institutions. How do the governments finance these deficits? The easy answer (and a widely practiced method) is just simply money printing. The result is higher inflation which has the same impact as a tax because both reduce purchase power. For the greed of a few corrupt people the whole country has to suffer loss in purchasing power. And the worst victims are those whose income does not increase with inflation (real incomes decline) and farmers are amongst this category.
Conclusion
I have never worked as a farmer and thus cannot describe how hard it really is. However one of my colleague had tried working in the fields once. According to him it is three times more difficult than pulling a rickshaw. I probably did not do justice to the farmers of Bangladesh and may have missed out the most important points.
Right now people give more value to things like BMW’s and Mazda’s compared to food, but that is going to change sometime or the other. We have already seen food crisis in 2008 and once again in 2011. In fact the protests that have shaken Middle East are somewhat related to food prices as well. There are no guarantees that international weather conditions would improve anytime soon and we might see a situation where food could easily become the most expensive item in the world. If all that is true maybe we should try to ensure that our farmers live a better life and are not deprived because of our actions and misdeeds.
Please share article if you have liked it.
Foreword
This is not going to be a really organized post. I just felt like writing something about deprived people and did not feel like collecting any data to back up the claims I am going to make. Most of the claims will be based on logic.
Before I go into the topic I want to talk a bit about myself. I am a member of the privileged class. I studied in an English Medium school and a private university because my parents could afford it (they did have difficulty and I am grateful for the education I got). But frankly speaking, if I had not received this education and had been born in a poorer family I might have ended up in the streets. It is required that people like me acknowledge that we are lucky and that we have a responsibility towards specific groups of people.
The farmers of Bangladesh
The people I want to talk about first (next parts will hopefully focus on other groups including remittance earners and workers with minimum wages) are the farmers of Bangladesh. Bangladesh is about 90% (this is just a guess) self sufficient in rice production. This is definitely a big achievement considering the land area and the total population of the country. Food is a necessity and the simple fact that we are almost self sufficient in food production has saved the country from huge macroeconomic shocks. One interesting thing about economics is somehow everything is linked. Just because of food self sufficiency I can think (If I had time I could possibly expand this list) of the following factors
1.Lower inflation: This can be proven very easily. Firstly inflation rates in Bangladesh are still single digit whereas in neighboring India and Pakistan it is much higher. Another method would to compare PPP prices of rice amongst these countries.
2.Fx reserves: We are not having to import too much rice and hence we are not losing Fx reserves. That foreign currency is being used to import raw materials, capital machinery and luxury goods.
3.Food security: The world is currently going through a tough phase. A country dependent on others for imports can easily face a situation where no one wants to export food. We have been able to avoid that problem largely.
How they are losing out (the common factors)
The problem with farmers is that when production suffers due to weather problems (or any other factor) they make losses as they cannot recover their investments. However, the same problem is again seen when they have bumper harvests. In such times also product prices fall below their costs. So either way they lose. Together with this consider the margin that is stolen by the middle men. All this is common knowledge and all of us know it. The farmers themselves know it but since they were not born in the privileged society they have to live with these problems.
What did we miss?
There are however some other factors that we did miss. Central banks usually keep target inflation rates of around 4-7%. However, inflation rates frequently cross these targets. In such periods there are people who cannot pass on the increased cost of living by increasing product prices. While I do not have backing data on this, I am quite sure that farmers lose out in inflationary scenarios. The only way they can survive is by consuming less. I read numerous news of farmers in India committing suicide because they could not bear any more losses. The funny this is that because of the monetary system that central banks run, money supply will continuously increase and inflation will continue to happen.
In this same line of thought let me talk a bit about “inflation tax”. Like most countries in the world Bangladesh has been running budget deficits. Some of the deficit was there because the government had to improve the infrastructure, provide security, healthcare and education etc. However deficits are also increased by corruption and inefficiencies. Deficits are increased by state owned institutions that run at losses (due to greedy people). Deficits are increased by government’s bailing out of the stock market and failed institutions. How do the governments finance these deficits? The easy answer (and a widely practiced method) is just simply money printing. The result is higher inflation which has the same impact as a tax because both reduce purchase power. For the greed of a few corrupt people the whole country has to suffer loss in purchasing power. And the worst victims are those whose income does not increase with inflation (real incomes decline) and farmers are amongst this category.
Conclusion
I have never worked as a farmer and thus cannot describe how hard it really is. However one of my colleague had tried working in the fields once. According to him it is three times more difficult than pulling a rickshaw. I probably did not do justice to the farmers of Bangladesh and may have missed out the most important points.
Right now people give more value to things like BMW’s and Mazda’s compared to food, but that is going to change sometime or the other. We have already seen food crisis in 2008 and once again in 2011. In fact the protests that have shaken Middle East are somewhat related to food prices as well. There are no guarantees that international weather conditions would improve anytime soon and we might see a situation where food could easily become the most expensive item in the world. If all that is true maybe we should try to ensure that our farmers live a better life and are not deprived because of our actions and misdeeds.
Please share article if you have liked it.
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