Bangladesh Country Risk Report Q4 2018
We expect Bangladesh's real GDP growth to slow to 7.2% in FY2018/19 (July-June), from 7.7% in FY2017/18, due to a likely moderation in garment export growth. However, the construction sector, which we expect to remain an outperformer in FY2018/19 due to the implementation of mega-projects, will likely continue to support growth over the coming quarters.
We believe that support for the Awami League government is likely to remain strong at the parliamentary elections which must be held by end-2018. This is likely to be supported by the populist FY2018/19 (July-June) budget, which saw a significant increase in planned spending that is targeted at the rural agricul-ture community and social development. We maintain Bangladesh's short-term political risk score at 58.1 (out of 100), but note that risks to social stability are weighted to the downside.
Bangladesh Bank left its policy rates unchanged for at its policy meeting on July 31. We expect the central bank to stay with its policy rates through end-FY2018/19 given the need to keep domestic inflation in check amid downward currency pressures, despite its pro-growth bias.
We believe that there is little credibility to Bangladesh's FY2018/19 (July-June) budget figures and expect the government to miss both its targets for revenue and expenditure, similar to previous years. In addition, we forecast the fiscal deficit to widen to 4.2% of GDP in FY2018/19. The shift in budget allocation towards public services, away from more productive sectors, is likely to be negative for growth.
We maintain our expectations for Bangladesh's real interest rate to narrow against the US, and a further deterioration in terms of trade to weigh on the Bang-ladeshi taka in the short-term. Over the longer term, we expect the taka to underperform the US dollar in spot terms due to the currency's overvaluation, and higher inflation in Bangladesh vis-a-vis the US.
Religious and social tensions remain elevated within the population, and an escalation of communal violence and social instability could further weigh on the already-poor business environment and discourage investment.
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