Highlights

  • Stable high growth correlates with a resilient and well-performing garment industry
  • Overdependence, safety and automation issues are risks for the crucial garment sector
  • Ample yet decreased workers’ remittances support consumption and current account balance
  • Political instability has reduced at the cost of rising terrorism risk and creeping Islamic radicalism
  • Poor public finances constrain future development plans while infrastructure projects are underway

Stubbornly stable and strong economic performances driven by the garment industry

In spite of having been hit by several (external or domestic) shocks in the past decade,
Bangladesh has kept its risk profile almost unchanged while recording a stubbornly stable
average GDP growth above 6%. It even accelerated to exceed the 7% threshold last fiscal year (FY) 2016-2017. This robust growth rate is forecast to remain constant in the next five years. Growth is notably driven by a resilient, dominant and fast-expanding low-cost garment sector. High reliance (i.e. about half of total exports) on garments represents a long-term risk not only given fierce regional competition but also because of the potential threat automation poses to the sector.

Moreover, the industry was shaken by deadly factory collapses, especially in 2013 when over 1,100 people died in the Rana Plaza complex in capital Dacca, which led to heavy western criticism. Since then, external pressures have abated after the government and retail multinationals took some measures to improve working conditions. In practice, until now, only limited progress has been recorded in most of the 4,500 garment factories. Recently, many international brands – excluding major ones though – agreed to extend the binding ‘Bangladesh safety accord’ by 3 years. This could hopefully give a boost to the slow process of improving safety conditions in garment factories.

In the coming years, safety and especially automation considerations set aside, there still remains optimism for Asia’s second-largest garment industry, which offers competitive labour costs, benefits from EU preferential access and continues to perform strongly.

Workers’ remittances remain a significant factor of support and stability to the economy

Bangladesh receives huge workers’ remittances (28.5% of total current account receipts) from Gulf countries (about 60% of remittances) which support domestic consumption, together with the rising middle class, and mitigate potential balance of payments pressures. Since 2016, remittances have dropped as a result of weaker construction and slower investments in the Gulf. Hence, remittances fell to a 5-year low in 2017. However, there is an increasing source of informal remittances whereas higher oil prices might support their future growth from the Gulf. Weaker remittances and heightened FDI-related imports brought the current account into deficit last year. It is forecast to widen gradually to more than 2% of GDP as from 2019 as it will be fuelled by rising imports of raw materials for infrastructure projects and costlier oil imports.

The country enjoys high macroeconomic stability and the Bangladesh taka is also relatively stable (against the US dollar) which is made possible by the central bank’s sporadic interventions.

The financial risk is weak as a result of a cautious debt policy and expected to remain so in the medium to long term. External debt, at 18% of GDP and 88.6% of export receipts in FY 2017-2018, is forecast to increase only slightly in the coming years. In spite of weaker remittances and a slight negative trend, foreign exchange reserves remain comfortable and picked up to an all-time high in August 2017. Currently, they cover 6.5 months of imports and a small but slowly rising debt service of less than 5% of export earnings on a mainly concessional external debt.

A volatile and unstable political and security environment

Several downside risks cloud the MLT risk outlook. Political instability is a chronic one. It increased after the ruling Awami League (AL) won the 2014 elections boycotted by opposition nationalist and Islamic party BNP. Since then, the country has been characterised by frequent opposition-led protests, unrest, business and trade disruptions. However, political violence has somewhat decreased in the past two years with a weakened BNP and a banned Jammat-e-Islami, the largest Islamic party. On the other hand, the security risk has deteriorated in a context of rising Islamic radicalisation and terrorism risks particularly targeting minority religious communities, civil society and foreigners. Though police raids against IS cells have allowed the arrests of tens of Islamist militants, the threat to national security is unlikely to wane as underlying factors remain unaddressed. Therefore, the government rapprochement to Islamist organisations is progressively making Muslim conservatism become the new norm in the Bangladeshi society and among political parties to the detriment of moderate Islamism and AL’s traditional secularism. On the upside, it might enhance political stability beyond the December 2018 elections given that the AL is expected to win. The BNP might participate this time but has been much weakened by hundreds of arrests among activists and leaders, and especially by the 5-year prison sentence for BNP leader Zia due to corruption allegations. Protests and instability are likely in the run-up to the elections.

An extra bout of tension has arisen at the country’s southeastern border with Myanmar where a further 700,000 Rohingya refugees are based in camps after having fled Myanmar. The agreed plan to repatriate them could take years to be fully, if ever, implemented. Meanwhile, the Rohingya humanitarian crisis could lead to social tensions, fuel domestic radicalism and integration of refugees into regional terrorist networks.

Fiscal constraints hinder development plans

Another top risk lies in poor public finances. Though public debt is low (33.3% of GDP in FY2016-2017) and expected to slightly rise to 37% of GDP by 2021, the Bangladeshi government’s budget room of manoeuvre is sharply constrained by Asia’s lowest public revenue ratio. It even fell under 10% of GDP in FY2015-2016, i.e. a regional low.

Therefore, 16% of revenues are absorbed by interest payments despite the small public debt. No significant improvement is expected with a fiscal deficit projected to stay above 4% of GDP until 2021. Since early 2016, Bangladesh is no longer bound to an IMF programme, which seems to affect fiscal reforms. Yet, the government has to create fiscal space to meet its spending commitments, not only rising social spending in a poor country, but also infrastructure investments in the framework of the ‘2016-2020 Plan’ (aimed at addressing persisting huge bottlenecks) which also foresees a dominant contribution from the private sector through PPP. Political turmoil and an overall difficult business environment are downside risks weighing on private and foreign investments though.

Economic risks might also emerge from the US protectionism and anti-immigrant stance as the US account for 25% of Bangladeshi exports and 15% of remittances. Last but not least, Bangladesh is vulnerable to climate change and the rising sea level, which fuels social tensions in an overcrowded country. Understandably, agriculture, job creation and resilience to climate change are among the government’s priorities.

The remarkable resilience of Bangladesh’s economy demonstrates its capacity to withstand exogenous shocks and rising political risks. It explains Credendo’s stable outlook for MLT political risk rating in 4/7.
 
Analyst: Raphaël Cecchi – r.cecchi@credendo.com