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Bangladesh economic growth may slow to 6.9pc this fiscal

Standard Chartered lists inflation, non-performing assets in banks, possible political unrest as sore points

FE Report | December 28, 2017 00:00:00

Bangladesh economy may grow at a slower pace of 6.9 per cent this fiscal year after a record growth of 7.28 per cent in the last fiscal, a global financial giant forecasts.

The latest reckoning on the state of economy of the country came from Standard Chartered -- after prospective ratings by several foreign financiers to Bangladesh, who also a little lowered the growth below government projection.

The lagged impact of floods is likely to dampen growth during the second half of FY18 and election-related uncertainty may lead to lower economic activity during the first half of FY19, it cautioned in its global economic research views revealed Wednesday.

"Bangladesh is entering 2018 with strong fundamentals -- growth is at an all-time high, a balance-of-payments surplus has boosted reserves to a record high, and debt remains manageable," the banking giant noted about things of the near-past.

Focusing on the flipside that may cast its shadow, it said inflation started rising in the country and banking-sector nonperforming assets (NPAs) remained elevated.

"We expect growth, while robust, to moderate to 6.9% in FY18 from 7.3% in FY17," the British banking giant projected.

While noting that the national elections are due in December 2018 or January 2019, it also recalled that previous election period in 2014 was marked by violence and strikes that significantly disrupted economic activity.

"While we do not expect such large-scale disruptions this time, some impact on economic activity in H1-FY19 cannot be ruled out," StanChart says.

The financial major, in its global economic review, also highlighted various challenges facing Bangladesh's banking arena.

"The banking sector has continued to face challenges," it said, adding: "The capital adequacy ratios (CARs) of state-owned commercial and development banks were 5.9% and -33.7%, respectively, as of March 2017 - far lower than the 10% required under the Basel II framework," it noted.

"Given the magnitude of these shortfalls, the government might increase budgetary provision for recapitalisation in FY19 (from a low level of Tk 20 billion in FY18)," says the review report, while noting that the gross NPA ratio in the country increased to 10.1 per cent in March 2017 from 8.8 per cent in 2015.

Standard Chartered also projects the country's current-account-deficit to widen to 1.0 per cent of GDP in FY18 from 0.5 per cent in FY17.

"The trade deficit is set to widen on higher infrastructure-related imports, rising commodity prices (especially crude oil), and higher food imports," it noted.

The bank also expects the country's remittance growth to rebound to 5.0 per cent in FY18 following a 14.5 per cent fall in FY17 -- thanks to about a 30 percent increase in the number of outbound workers in FY17 and government efforts to increase formal remittances.

"We expect a US$ 2 billion BoP surplus in FY18, supported by capital inflows. FX reserves are therefore likely to stay comfortable at 7-8 months of import cover," it said.

Standard Chartered, in its research, also expects policy rates to remain on hold in FY18 as inflation exceeds the target.

"We forecast average FY18 inflation at 5.9 per cent as against Bangladesh Bank's FY18 target of 5.5 per cent," it said.

At the same time, fiscal deficit is likely to widen to 4.5 per cent of GDP in FY18 from 3.5 per cent in FY17, below the budgeted 5.0 per cent-- Standard Chartered predicts.

It also noted that the FY18 budget includes an estimated BDT 200bn worth of revenue shortfall (about 8 per cent of FY18 budgeted revenue) due to the delayed implementation of the new VAT law.

The global financial giant also expects Bangladesh's public expenditure to be much lower than the actual target due to the usual implementation shortfall.

When it comes to FX market, Standard Chartered predicts a modest depreciation of the Bangladeshi Taka in 2018, and forecast the USD-BDT rate to be 'at 83.50 by mid-2018 and to 84.50' given a likely wider current-account deficit and higher political uncertainty.

Focusing on the international front, Standard Chartered projects a solid global growth of 3.9 per cent in 2018, similar to 2017.

"But the Year of the Dog is no time for complacency," the financial giant cautioned.

"China's growth is likely to ease moderately as it continues to rebalance towards consumption from investment," it said, adding: "We expect growth in the US and euro area to exceed 10-year averages, although this is not a particularly high bar."

However, Standard Chartered projects little chance that global growth will recover to the 4.2 per cent pre-Global Financial Crisis average.

"Fiscal policy has turned mildly supportive of world growth, while monetary policy in general is likely to shift from ultra-accommodative to more neutral as inflation rises but remains well below longer-term averages," it noted.

"The biggest risk to our benign view on global growth in 2018 -- which is also the broad market consensus -- is complacency," Standard Chartered concluded.

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