Bangladesh Country Risk Report Q4 2019
We believe Bangladesh's reliance on its large ready-made garment sector for growth can both be a boon and a bane for the Bangladeshi economy over the long term. The Bangladesh garment sector will likely be among the top beneficiaries from the ongoing structural shift in low-end manufacturing out of China. However, the country's strong reliance and constant focus on growing its ready-made garments sector could inhibit its wage growth and the country's move up the value chain, and this could hinder Bangladesh's goal to become a developed country by 2041.
We maintain our view for Bangladesh Bank (BB) to keep its policy interest rates on hold for FY2019/20. This follows BB's decision to keep its repurchase and reverse repurchase rates unchanged at 6.00% and 4.75%, respectively, at its H1 FY2019/20 (July-June) monetary policy meeting on July 31. Our forecast for inflation to average 5.7% in FY2019/20, just slightly above Bangladesh Bank's 5.5% target ceiling for the fiscal year, informs our view for BB to be in no rush to raise its policy interest rates as it continues to keep monetary policy accommodative to support the attainment of the government's 8.2% real GDP growth target for FY2019/20.
Bangladesh passed its FY2019/20 (July-June) budget on June 29, and similar to previous years, we expect the government to miss both its revenue and expenditure projections by a significant margin. However, we forecast the overall fiscal deficit (excluding grants) to come in at 4.8% of GDP, slightly below the government's 5.0% projection for FY2019/20. While a stronger focus on education and technology, as well as transport infrastructure spending should be positive for long-term growth, we remain sceptical with regard to the actual spending by the government in these areas for the current fiscal year.
We maintain our forecasts for the Bangladeshi taka to average BDT84.50/USD in 2019 and BDT86.00/USD in 2020. Over the short term, we believe that BB will continue to ensure taka stability, although with a slight bias towards currency weakness to support the achievement of the government's real GDP growth target for FY2019/20 (July-June). Over the longer term, taka overvaluation will likely continue to see import growth outpace exports, which combined with a worsening remittance outlook, and persistently higher inflation relative to the US, inform our view for the taka to remain on a broad depreciatory trend against the US dollar.
We believe that Bangladesh will continue benefiting from strong Chinese investment over the coming decade. However, an excessive reliance on Chinese capital could risk Bangladesh falling into a 'debt trap', as was the case of Sri Lanka's Hambantota port. Moreover, we also highlight the risk of a backlash against Chinese investment as the use of Chinese labour in Chinese-funded projects could spark discontent, as in other countries such as Malaysia.
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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