Industry, services likely to pick up in coming months
Monday, 4 January 2010
FE Report
Bangladesh has weathered the global crisis well. Its economy has barely slowed, though the external challenges do mean some headwinds in the short term.
According to an economic outlook titled Standard Chartered Global Focus | 2010 - The Year Ahead Bangladesh, prospects are good and the risks lie to the upside. The policy environment is sound, and structural reform initiatives are underway that should help to alleviate poverty and secure longerterm growth potential.
“We expect 2009 GDP growth to be 5.9%, a creditable performance broadly in line with longterm trends,”Christine Shields, Head of Country Risk Research, Standard Chartered Bank said.
We forecast 5.5% for 2010 and 6.0% for 2011, confirming the economy's resilience, with industry and services both likely to pick up in the coming months. This partly reflects the government's plans for new infrastructure investment, a welcome - if overdue - impetus. There are some downside risks to the agriculture sector, which is always vulnerable to the vagaries of the weather. Likewise, the outlook for the important textiles sector could darken if global growth is weaker than we expect, though so far the industry has benefitted from being a low-cost and competitive alternative to other locations. Remittances could also slip.
Inflation has edged lower thanks to declining food and fuel prices, but there is growing upside pressure from more expansionary monetary policy as capital inflows increase. This has put upward pressure on the currency, the Bangladesh taka (BDT), requiring intervention by Bangladesh Bank. This has boosted monetary growth, as the intervention was partly unsterilised. Short-term interest rates have fallen sharply.
The external position has strengthened and foreign exchange reserves have risen strongly, in part due to foreign appetite for the recent telecoms IPO and strong remittance inflows, despite the slowdown in the Gulf.
Although there is no formal IMF support in place, the Fund regularly reviews the economy and has suggested that the government adopt a more flexible currency policy. This could perhaps be achieved in the short term by adopting a narrow band for the BDT to trade against the USD. The authorities have been rigorous in their pursuit of financial stability, and the financial sector suffered limited contagion from the crisis. Much progress has been made in raising risk management standards and in capital management, all part of the steps being taken towards Basel-two readiness.
Fiscal policy is prudent, with the budget deficit contained at some 4-5% of GDP. However, the tax base is unusually narrow, while infrastructure needs are high. Measures to address these shortcomings are slowly evolving, but progress will be slow. There is a risk of fiscal slippage if oil prices start to climb again, forcing energy subsidies to be raised. Monetary policy is also conservative. Bank supervision is pro-active, and the authorities are keen to curb excess liquidity in the system. Interest rates should remain stable.
The ruling Awami League appears to be advancing with its reform agenda and faces little challenge to its supremacy. The conclusion of the trial of those charged with the assassination of the country's founder is another welcome step away from the past practice of political violence, though frequent protests can still be a challenge to stability.
Bangladesh has weathered the global crisis well. Its economy has barely slowed, though the external challenges do mean some headwinds in the short term.
According to an economic outlook titled Standard Chartered Global Focus | 2010 - The Year Ahead Bangladesh, prospects are good and the risks lie to the upside. The policy environment is sound, and structural reform initiatives are underway that should help to alleviate poverty and secure longerterm growth potential.
“We expect 2009 GDP growth to be 5.9%, a creditable performance broadly in line with longterm trends,”Christine Shields, Head of Country Risk Research, Standard Chartered Bank said.
We forecast 5.5% for 2010 and 6.0% for 2011, confirming the economy's resilience, with industry and services both likely to pick up in the coming months. This partly reflects the government's plans for new infrastructure investment, a welcome - if overdue - impetus. There are some downside risks to the agriculture sector, which is always vulnerable to the vagaries of the weather. Likewise, the outlook for the important textiles sector could darken if global growth is weaker than we expect, though so far the industry has benefitted from being a low-cost and competitive alternative to other locations. Remittances could also slip.
Inflation has edged lower thanks to declining food and fuel prices, but there is growing upside pressure from more expansionary monetary policy as capital inflows increase. This has put upward pressure on the currency, the Bangladesh taka (BDT), requiring intervention by Bangladesh Bank. This has boosted monetary growth, as the intervention was partly unsterilised. Short-term interest rates have fallen sharply.
The external position has strengthened and foreign exchange reserves have risen strongly, in part due to foreign appetite for the recent telecoms IPO and strong remittance inflows, despite the slowdown in the Gulf.
Although there is no formal IMF support in place, the Fund regularly reviews the economy and has suggested that the government adopt a more flexible currency policy. This could perhaps be achieved in the short term by adopting a narrow band for the BDT to trade against the USD. The authorities have been rigorous in their pursuit of financial stability, and the financial sector suffered limited contagion from the crisis. Much progress has been made in raising risk management standards and in capital management, all part of the steps being taken towards Basel-two readiness.
| Standard Chartered Research Forecasts: Bangladesh | ||||
| 2009 | 2010 | 2011 | 2012 | |
| GDP (real % y/y) | 5.9 | 6.0 | 6.0 | 6.5 |
| CPI (% y/y) | 6.7 | 6.0 | 6.3 | 6.3 |
| Policy rate (%)* | 6.5 | 6.5 | 7.0 | 7.0 |
| BDT-USD* | 69.0 | 69.0 | 70.0 | 70.0 |
| Current account balance (% GDP) | 2.1 | 1.0 | 0.8 | 0.5 |
| Fiscal balance (% GDP)** | -4.1 | -4.5 | -4.9 | -4.5 |
Fiscal policy is prudent, with the budget deficit contained at some 4-5% of GDP. However, the tax base is unusually narrow, while infrastructure needs are high. Measures to address these shortcomings are slowly evolving, but progress will be slow. There is a risk of fiscal slippage if oil prices start to climb again, forcing energy subsidies to be raised. Monetary policy is also conservative. Bank supervision is pro-active, and the authorities are keen to curb excess liquidity in the system. Interest rates should remain stable.
The ruling Awami League appears to be advancing with its reform agenda and faces little challenge to its supremacy. The conclusion of the trial of those charged with the assassination of the country's founder is another welcome step away from the past practice of political violence, though frequent protests can still be a challenge to stability.