War further clouds private credit demand

Private-sector credit growth slowed to 6.03% in January (lowest in at least five years; eighth consecutive month below 7%), while private investment fell to 22.03% of GDP in FY2024-25 (lowest in 11 years). The US-Israel war on Iran has driven Brent crude to $103.14/barrel (up >42% since the conflict began and almost $120 intraday), raising oil, LNG and shipping costs, weakening the taka and increasing import bills—factors that are likely to keep banks cautious and suppress new private investment and credit demand.

Analysis

The immediate macro channel to watch is a feedback loop: higher imported energy + shipping costs -> worse external deficit -> FX pressure -> either tighter local policy or further currency depreciation. Both policy paths depress real credit demand: tighter rates raise borrowing costs and provisioning, while depreciation increases corporate FX exposure and forces balance-sheet repair. Expect material credit quality slippage in specific sectors (energy-intensive manufacturers, fertilizer and agro-input importers, and apparel exporters with short USD tails) over a 3–12 month window rather than instant widespread bank insolvency.

Second-order winners are players with hard-currency cashflows or pass-through pricing: global oil & LNG producers, commodity traders with hedged inventory, and insurers/reinsurers of maritime risk. Second-order losers include domestic-focused banks with high share of local-currency SME lending and import-dependent industrial suppliers; these will see margins compress and NPL formation accelerate 6–18 months out. Political uncertainty around elections compounds the pause in capex, meaning capital goods and construction suppliers face a multi-year demand downgrade unless stabilized by credible reforms.

Catalysts that would reverse this are clear: (1) rapid de-escalation in the Middle East leading to a >20% rollback in shipping spreads within 30–90 days, (2) a targeted FX support package or IMF-style program that restores reserves and confidence within 3–6 months, or (3) coordinated subsidy/price-pass-through measures that blunt corporate margin shocks. Tail risks include prolonged conflict driving Brent to multi-month sustained highs or a disorderly FX adjustment triggering sovereign spread blowouts; both would materially reprioritize allocation toward liquid hedges and away from EM credit over 6–24 months.

Key Decisions for Investors

• Oil directional (3-month catalyst): Buy a Brent/WTI oriented call spread via BNO 3-month call spread (buy nearer-dated call, sell higher strike). Rationale: capped premium for asymmetric payoff if conflict escalates; target 2–4x upside if Brent > prior highs. Size as tactical (1–3% portfolio). Risk: premium loss if no escalation within term.
• Energy vs EM banks pair (3–12 months): Long XOM or CVX (1–2% net) and short EEM (EM equity ETF) sized to dollar-neutral exposure. Rationale: captures oil producers’ margin upside while shorting broad EM cyclicals and banks that suffer from FX/import-cost shock. Risk/Reward: skewed to upside if oil premiums persist; mark-to-market volatility on EEM in global risk rallies.
• Sovereign/credit hedge (6 months): Buy puts or a put-spread on EMB (iShares J.P. Morgan EM Bond ETF) to hedge widening sovereign spreads; alternative: pay a modest premium for a 6-month put. Rationale: protects portfolio from EM sovereign/FX stress if import bill and reserve erosion worsen. Risk: premium erosion if markets calm.
• Inflation/FX hedge (3–12 months): Overweight GLD or buy UUP call exposure (Dollar Bull ETF) as a hedge against stagflation and BDT depreciation. Rationale: gold benefits from inflation and risk-off; USD strength is the direct FX hedge. Risk/Reward: gold may lag in rapid risk-on; USD can reverse on global deleveraging or coordinated intervention.