War further clouds private credit demand

Private sector credit in Bangladesh grew 6.03% YoY in January (the lowest in at least five years) and has been below 7% for eight consecutive months, while private investment fell to 22.03% of GDP in FY2024-25 (an 11-year low). Brent crude closed at $103.14/bbl and is up >42% since the start of the Middle East conflict (briefly near $120), raising import bills for a country that imports ~95% of its oil and weakening the taka versus the USD. Banks are tightening lending amid asset-quality concerns and businesses are delaying investment, implying subdued credit growth, higher inflationary pressure, and stress on the balance of payments.

Analysis

The shock to energy and shipping costs is acting like a tax shock for an import-dependent, FX-constrained economy: higher external bills transmit almost immediately into FX reserves pressure, tighter local liquidity and a higher cost-of-capital for banks. That sequence is why private investment stalls even when borrowers technically have capacity — the marginal cost of funding and the expected real return on new projects have both fallen, lengthening payback thresholds by multiple quarters.

Banks will respond not just by repricing new loans but by tightening underwriting, which creates a feedback loop: weaker credit demand reduces bank revenues, pressuring NIMs and ROE, which in turn encourages risk‑averse capital allocation and slower provisioning cycles. Non-bank corporates with USD revenues but imported intermediate goods face a mixed outcome — currency translation gains on topline are often offset by margin pressure from shipping and commodity input inflation, pressuring working capital and increasing rollover risk.

Near-term catalysts that would reverse stress are discrete and fast: a durable diplomatic corridor reopening, a coordinated release of strategic stocks, or an aggressive FX intervention by the central bank; absent these, expect credit and investment languor to persist over the next 3–12 months, with episodic volatility tied to headline war developments. Monitor sovereign FX reserves, shipping insurance (war-risk) premiums and bank loan-loss provisioning trends as high-frequency indicators of stress and turning points.

Key Decisions for Investors

• Long tanker owners (DHT, NAT) — 0.5–1.5% portfolio each, 1–3 month horizon. Trade rationale: tanker charter rates spike asymmetrically during Strait disruptions; expected upside 40–100% if rates sustain, downside capped to equity drawdown if conflict de‑escalates. Use 10–15% out-of-the-money protective puts to cap tail risk.
• Long LNG infrastructure/terminal names (LNG — Cheniere Energy) — 1% portfolio, 3–12 month horizon. Rationale: elevated gas/LNG margin environment and rerouting increases spot demand for contracted capacity. Payoff: steady cash-flow re-rating; downside: global demand shock or softening gas prices — set stop-loss at 20%.
• Macro hedge: long UUP (USD) and buy 3-month puts on EEM (iShares MSCI Emerging Markets) — combined hedge sized to cover EM sovereign exposure. Rationale: FX and EM spread widening likely if import bills continue; puts protect 8–15% downside in stressed scenarios. Cost: option premium; exit when EMB spreads compress 50–75bps or DXY retreats materially.
• Credit protection: buy 3–6 month puts on EMB or increment allocation to EM sovereign CDS where liquid. Rationale: Bangladesh and similar import-dependent sovereigns will see spread widening under sustained oil/shipping stress; expected spread widening is 50–200bps, offering >1.5x payoffs for well-timed protection. Keep position small (1–2% notional) as insurance and roll if conflict persists.