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Bangladesh Country Risk Report Q1 2016

  • June 2016
  • -
  • Business Monitor International
  • -
  • 43 pages

Core Views

We expect Bangladesh's real GDP growth to remain stable at 6.5%in FY2015/16 (July-June), before accelerating to 6.7% in FY2016/17,on the back of a relatively more stable political backdrop, resiliencein foreign-currency earnings, and strong government initiatives todevelop supporting infrastructure. That said, fiscal weaknesses, apoor financial system and a rise in domestic security threats couldpose downside risks to Bangladesh's economic growth trajectoryover the medium term.Following Bangladesh Bank (BB)'s decision to cut its benchmarkinterest rates by 50 basis points in January, we expect the centralbank to stand pat on its interest rate policy at its upcoming meetingin July due to volatile food inflation and rising core inflationary pressures.At the same time, a constructive growth outlook attributed togreater political stability and stable foreign currency earnings will alsoreduce the need for BB to significantly ease its policy rates. Instead,we believe that BB will continue its selective easing measures todirect investment towards priority sectors of the economy.We highlight that Islamist violence and religiously motivated killings inBangladesh could intensify over the coming months if the governmentcontinues to crack down on political dissent and maintains the paceof war crimes executions.

This would pose downside risks to politicalstability in the country, and weigh on the business environment.Accordingly, we note that a downgrade of Bangladesh's political riskindex score is possible if the situation deteriorates.The Bangladeshi government's focus on the transport, communication,technology and education sectors in its FY2016/17 budgetwill be supportive of the country's economic growth trajectory overthe medium-to-long term. While we note that both revenue andspending targets are overly ambitious, we believe that the increasein planned allocations to these strategic sectors is nevertheless astep in the right direction, which will help to improve Bangladesh'scompetitiveness as a manufacturing hub and address the country'sinfrastructure deficit.Major Forecast ChangesBangladesh's trade balance is likely to deteriorate to a forecast -3.1%of GDP in FY2016/17 (from an estimate of 2.9% in FY2015/16), aswe expect imports to rise at a faster pace than exports as a resultof a strong taka and a gradual recovery in oil prices. Accordingly,we forecast the current account balance to narrow slightly to 1.1%of GDP (slightly lower than the estimate of 1.4% in FY2015/16),but note that an improvement in remittances and still-strong exportgrowth will ensure that the current account remains in surplus. Thisreflects a well-balanced economy which should be constructive formedium-term growth.We believe that the government is highly unlikely to meet its aggressiveexpenditure and revenue targets as outlined in the FY2016/17budget. Accordingly, we forecast Bangladesh's fiscal deficit to comein at 2.3% of GDP in FY 2016/17, representing a slight improvementfrom an estimated deficit of 2.5% (revised down from 4.3% previously)for FY2015/16.

Table Of Contents

Bangladesh Country Risk Report Q1 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Growth To Improve In FY2016/178
We expect Bangladesh's real GDP growth to remain stable at 65% in FY2015/16 (July-June), before accelerating to 67% in
FY2016/17, on the back of 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
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS10
Fiscal Policy And Public Debt Outlook 11
Positive Direction But Fiscal Targets Too Ambitious11
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
Structural Fiscal Position 12
TABLE: MAIN SOURCES OF REVENUE AND EXPENDITURE12
External Trade And Investment Outlook 13
Current Account To Remain In Surplus For FY2016/1713
Bangladesh's trade balance is likely to deteriorate to a forecast -31% of GDP in FY2016/17 (from an estimate of 29% in FY2015/16),
as we expect imports to rise at a faster pace than exports as a result of a strong taka and a gradual recovery in oil prices Accordingly,
we forecast the current account balance to narrow slightly to 11% of GDP (slightly lower than the estimate of 14% in FY2015/16), but
note that an improvement in remittances and still-strong export growth will ensure that the current account remains in surplus This
reflects a well-balanced economy which should be constructive for medium-term growth
Outlook On External Position 14
TABLE: MAIN EXPORT AND IMPORT PARTNERS15
TABLE: MAIN EXPORT AND IMPORT PRODUCTS15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE16
Monetary Policy 16
Constructive Growth Outlook To Trim Easing Bias16
Following BB's decision to cut its benchmark interest rates by 50bps in January, we expect the central bank to stand pat on its interest
rate policy at its upcoming meeting in July due to volatile food inflation and rising core inflationary pressures At the same time, a
constructive growth outlook attributed to greater political stability and stable foreign currency earnings will also reduce the need for BB
to significantly ease its policy rates Instead, we believe that BB will continue its selective easing measures to direct investment towards
priority sectors of the economy
Monetary Policy Framework 17
Chapter 2: 10-Year Forecast 19
The Bangladeshi Economy To 2025 19
Long-Term Potential Strong But Restricted19
We believe that a real GDP growth rate of 60% 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 FORECASTS19
Chapter 3: Political Outlook 21
SWOT Analysis 21
BMI Political Risk Index 21
Domestic Politics 22
Islamist Violence On The Rise, Downgrade Possible22
We highlight that Islamist violence and religiously motivated killings in Bangladesh could intensify over the coming months if the
government continues to crack down on political dissent, and maintains the pace of war crimes executions This would pose downside
risks to political stability in the country, and weigh on the business environment Accordingly, we note that a downgrade of Bangladesh's
political risk index score is possible if the situation deteriorates
TABLE: POLITICAL OVERVIEW22
Long-Term Political Outlook 23
Limited Chances Of Major Improvement23
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 RISK28
Economic Openness 29
TABLE: TOP 5 IMPORT PARTNERS and PRODUCT IMPORTS, USDMN30
TABLE: FREE TRADE AGREEMENTS31
TABLE: FREE TRADE ZONES AND INVESTMENT INCENTIVES33
Availability Of Labour 34
TABLE: AVAILABILITY OF LABOUR RISK34
TABLE: LABOUR FORCE EMPLOYMENT BY SECTOR, ('000)35
TABLE: TOP 10 SOURCE COUNTRIES FOR MIGRANT WORKERS37
Chapter 5: BMI Global Macro Outlook 39
Global Macro Outlook 39
Summer Of Risk39
TABLE: GLOBAL ASSUMPTIONS39
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %40
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %41
TABLE: MACROECONOMIC DATA and FORECASTS43

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