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Bangladesh Country Risk Report Q4 2016

  • September 2016
  • -
  • Business Monitor International
  • -
  • 41 pages

Core Views

We expect Bangladesh's real GDP growth to remain steady at 7.1% in both FY2015/16 (July-June) and FY2016/17, increasing from 6.5% in FY2014/15. The slight improvement in Bangladesh's growth outlook is informed by a relatively more stable political backdrop, resilience in foreign-currency earnings and strong government initiatives to develop supporting infrastructure. That said, fiscal weaknesses, a poor financial system and a rise in domestic security threats could pose downside risks to Bangladesh's economic growth trajectory over the medium term. Following Bangladesh Bank (BB)'s decision to leave its benchmark interest rates unchanged in July, we expect the central bank to hold interest rates steady again at its upcoming meeting in January due to rising core inflationary pressures and elevated credit growth. A constructive growth outlook attributed to greater political stability and stable foreign currency earnings will also reduce pressure on BB to ease its policy rates. Instead, we believe that BB will continue its selective easing measures to direct investments to priority sectors of the economy. There has been an increase in Islamist violence and the number of terrorist attacks in the country. The instability could persist over the coming months if the Awami League government continues to view the ongoing terrorist threats from the narrow prism of party politics, and denies the presence of foreign-linked Islamist terror groups in the country. The Bangladeshi government's focus on the transport, communication, technology and education sectors in its FY2016/17 budget will be supportive of the country's economic growth trajectory over the medium-to-long term. While we note that both revenue and spending targets are overly ambitious, we believe that the increase in planned allocations to these strategic sectors is nevertheless a step in the right direction which will help to improve Bangladesh's competitiveness as a manufacturing hub and address the country's infrastructure deficit.Major Forecast Changes We forecast that real GDP growth will remain stable at 7.1% in FY2016/17, unchanged from estimates for FY2015/16. An increase in public infrastructure investments – especially in energy and transport – and resilient industrial production will support growth. We believe that the government is highly unlikely to meet its aggressive expenditure and revenue targets as outlined in the FY2016/17 budget. Accordingly, we forecast Bangladesh's fiscal deficit to come in at 2.8% of GDP in FY 2016/17, representing a slight improvement from an estimated deficit of 3.0% for FY2015/16. We have downgraded Bangladesh's short-term political risk index score to 61.0 from 62.7 previously, to reflect increased Islamist violence and terrorist attacks in the country, and the instability likely to continue in the near term.

Table Of Contents

Bangladesh Country Risk Report Q4 2016
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Infrastructure Development To Support Growth..........................................................................................................................8
Bangladesh's real growth for FY2015/16 (July-June) came in at 7.1%, up from 6.5% in FY2014/15. Bangladesh's near-term growth
will be sustained primarily by an increase in public infrastructure spending. We forecast real GDP growth to remain stable at 7.1% in
FY2016/17, but note that continued weakness in the export-oriented garment industries presents downside risks.
GDP By Expenditure Outlook.................................................................................................................................... 9
TABLE: GDP GROWTH FORECASTS......................................................................................................................................................................9
TABLE: PRIVATE CONSUMPTION FORECASTS....................................................................................................................................................9
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................10
Fiscal Policy And Public Debt Outlook ................................................................................................................. 11
Fiscal Deficit Narrows But Long-Term Challenges Remain......................................................................................................11
We expect Bangladesh's fiscal deficit to narrow to 2.8% of GDP in FY2016/17 as gradual improvements to tax collection mechanisms
boost revenues. However, we highlight that Bangladesh still struggles to diversify revenues away from indirect taxes and to implement
spending plans effectively, particularly for development projects. These challenges are likely to constrain Bangladesh's long-term
economic growth potential.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: MAIN SOURCES OF REVENUE AND EXPENDITURE.............................................................................................................................12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................12
Outlook On External Position.................................................................................................................................. 13
TABLE: MAIN EXPORT AND IMPORT PARTNERS...............................................................................................................................................13
TABLE: MAIN EXPORT AND IMPORT PRODUCTS...............................................................................................................................................13
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................14
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................14
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................14
Monetary Policy........................................................................................................................................................ 15
Inflation To Rise With Further Selective Easing.........................................................................................................................15
In line with our view, Bangladesh Bank left its benchmark repo and reverse repo rates unchanged at 6.75% and 4.75%, respectively,
during its July policy meeting, while pledging to maintain its selective easing measures. By allowing strategic sectors to access
affordable loans, we believe that selective easing may support near-term growth, which we expect to come in at 6.5% y-o-y in 2016.
However, increased credit growth will contribute to inflation risks.
Monetary Policy Framework.................................................................................................................................... 16
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................16
Chapter 2: 10-Year Forecast................................................................................................................... 19
The Bangladeshi Economy To 2025....................................................................................................................... 19
Long-Term Potential Strong But Restricted...............................................................................................................................19
We believe that a real GDP growth rate of 6.0% for Bangladesh is sustainable in the long term given the increasing size of the
workforce. However, to achieve growth in the 7-8% range and higher, productivity will need to improve. Until this happens, GDP per
capita - while on an upward trajectory - will remain relatively low.
TABLE : LONG-TERM MACROECONOMIC FORECASTS....................................................................................................................................19
Chapter 3: Political Outlook................................................................................................................... 21
SWOT Analysis......................................................................................................................................................... 21
BMI Political Risk Index........................................................................................................................................... 21
Domestic Politics .................................................................................................................................................... 22
Security Situation Likely To Worsen In Coming Months...........................................................................................................22
We have downgraded Bangladesh's short-term political risk index score to 61.0 from 62.7 previously, to reflect the intensification of
Islamist violence and terrorist attacks in the country. We highlight that the situation could worsen over the coming months if the Awami
League government continues to view the ongoing terrorist threats from the narrow prism of party politics, and denies the presence of
foreign-linked Islamist terror groups in the country.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................22
Long-Term Political Outlook................................................................................................................................... 23
Limited Chances Of Major Improvement....................................................................................................................................23
Although Bangladesh returned to full civilian rule following elections in December 2008, the political system remains immature and
prone to instability. We see only limited prospects for a substantial improvement over the next 10 years.
Chapter 4: Operational Risk................................................................................................................... 27
SWOT Analysis......................................................................................................................................................... 27
Operational Risk Index............................................................................................................................................ 27
Operational Risk ...................................................................................................................................................... 28
TABLE: OPERATIONAL RISK................................................................................................................................................................................. 28
Market Size And Utilities ......................................................................................................................................... 29
TABLE: ASIA - MARKET SIZE AND UTILITIES RISK............................................................................................................................................30
Labour Costs............................................................................................................................................................ 33
TABLE: LABOUR REGULATIONS GOVERNING FLEXIBILITY OF WORKFORCE............................................................................................... 34
Chapter 5: BMI Global Macro Outlook................................................................................................... 37
Global Macro Outlook.............................................................................................................................................. 37
EMs Past The Worst, But Structural Problems Persist.............................................................................................................37
TABLE: GLOBAL ASSUMPTIONS..........................................................................................................................................................................37
TABLE: DEVELOPED STATES - REAL GDP GROWTH, %.................................................................................................................................. 38
TABLE: EMERGING MARKETS - REAL GDP GROWTH, %.................................................................................................................................39
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................41

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