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Bangladesh Country Risk Report Q2 2016

Bangladesh Country Risk Report Q2 2016

Core Views Bangladesh's real GDP growth will likely remain stable at 6.5% in FY2015/16 (July-June) before picking up slightly to 6.7% in FY2016/17, aided by an accommodative monetary policy, an expansionary fiscal policy and the return of a stable political climate. In particular, the government's ongoing focus on public investment into supporting infrastructures should help to attract more investment and boost productivity in the manufacturing sector, thus allowing Bangladesh to retain its dominant position in the global garment industry. Bangladesh's small budget surplus of 0.1% of GDP between July and October 2015 will likely flip into a deficit over the coming months as the government accelerates its capital and development expenditure to support growth in the economy. As such, we maintain our forecast for Bangladesh's budget balance as a share of GDP to come in at -4.3% in FY2015/16 (July to June). The Bangladeshi taka remained relatively stable against the US dollar for most of 2015, trading within a tight range of BDT77-80/ USD. Over the remainder of 2016, we expect broad stability but foresee downside risks on the currency due to our expectations for a significant slowdown in inbound remittances growth, as well as a lacklustre investment outlook. As such, we forecast the Bangladeshi taka to weaken slightly against the US dollar in 2016, taking the end-year exchange rate to BDT79.65/USD. The number of domestic terror attacks in Bangladesh could increase over the coming months, posing further downside risk to political and social stability as the Awami League government continues to dismiss the presence of the Islamic State in the country and downplay the scale of the threat. Accordingly, we have downgraded Bangladesh's Short-Term Political Risk score to 62.4, from 64.2 previously. This could have an adverse impact on the country's economic growth prospects as investors, expatriates and tourists may be deterred. That said, the recent establishment of a counter-terrorism special task force should help to alleviate some security risk concerns. Bangladesh Bank will likely hold off further interest rate cuts over the remainder of 2016 as volatile food inflation and rising core inflation will constrain the monetary authority's policy options. However, the central bank could adopt more selective easing measures over the coming months if stimulus effects fall short of its expectations.


Executive Summary
Core Views
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Supportive Macroeconomic Policies To Underpin Growth
Bangladesh's real GDP growth will likely remain stable at 6.5% in FY2015/16 (July-June) before picking up slightly to 6.7% in
FY2016/17, aided by an accommodative monetary policy, an expansionary fiscal policy and the return of a stable political climate. In
particular, the government's ongoing focus on public investment into supporting infrastructures should help to attract more investment
and boost productivity in the manufacturing sector, thus allowing Bangladesh to retain its dominant position in the global garment
industry.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal And Public Debt Outlook
Fiscal Expenditure To Accelerate Over Coming Months
Bangladesh's brief budget surplus of 0.1% of GDP between July and October 2015 will likely flip into a deficit over the coming months
as the government accelerates its capital and development expenditure to support growth in the economy. As such, we maintain our
forecast for Bangladesh's budget balance as a share of GDP to come in at -4.3% in FY2015/16.
Structural Fiscal Position
TABLE: MAIN SOURCES OF REVENUE AND EXPENDITURE
Currency Forecast
BDT: Marked By Depreciatory Pressures
The Bangladeshi taka remained relatively stable against the US dollar for most of 2015, trading within a tight range of BDT77-80/
USD. Over the remainder of 2016, we expect broad stability but foresee downside risks on the currency due to our expectations for a
significant slowdown in inbound remittances growth, as well as a lacklustre investment outlook. As such, we forecast the Bangladeshi
taka to weaken slightly against the US dollar in 2016, taking the end-year exchange rate to BDT79.65/USD.
TABLE: BMI CURRENCY FORECAST
Outlook On External Position
TABLE: MAIN EXPORT AND IMPORT PARTNERS
TABLE: MAIN EXPORT AND IMPORT PRODUCTS
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
Monetary Policy
Volatile, Elevated Inflation To Hold Back Further Rate Cuts
Bangladesh Bank will likely hold off further interest rate cuts over the remainder of 2016 as volatile food inflation and rising core inflation
will constrain the monetary authority's policy options. However, the central bank could adopt more selective easing measures over the
coming months if stimulus effects fall short of its expectations.
Monetary Policy Framework
Chapter 2: 10-Year Forecast
The Bangladeshi Economy To 2025
Long-Term Potential Strong But Restricted
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
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Rise In Security Threats Could Hurt Growth Prospects
The number of domestic terror attacks in Bangladesh could increase over the coming months, posing further downside risk to political
and social stability as the Awami League government continues to dismiss the presence of the Islamic State in the country and
downplay the scale of the threat. Accordingly, we have downgraded Bangladesh's Short-Term Political Risk score to 62.4, from 64.2
previously. This could have an adverse impact on the country's economic growth prospects as investors, expatriates, and tourists may
be deterred. That said, the recent establishment of a counter-terrorism special task force should help to alleviate some security risk
concerns.
Long-Term Political Risk
Limited Chances Of Major Improvement
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
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK
Trade Procedures And Governance
TABLE: ASIA – TRADE PROCEDURES AND GOVERNANCE RISK
TABLE: IMPORT AND EXPORT DOCUMENTS
TABLE: TRADE PROCEDURES BREAKDOWN
Vulnerability To Crime
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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