Bangladesh: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|D||The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.|
Growth is expected to remain dynamic, but recent political and social unrest will continue to penalize investment
Activity remained buoyant during the 2015 fiscal year but the political and social unrest occurring from January again affected the economic life of the country. On 5 January 2015, the anniversary of the contested parliamentary elections in 2014, the opposition called for a transport blockade. This slowed the transfer of goods and drove up the cost of transport. Although the blockade was lifted in April, it affected investor confidence. In 2016, private investment will remain constrained by uncertainties over the country's social and political stability. Nonetheless, the country will benefit from a large investment by a Canadian company operating in the photovoltaic sector. This project will, moreover, help develop the country's electrical capacity, which is regularly affected by power cuts. Several public infrastructure projects are also due to be put in place.
Meanwhile, household consumption, the main component of GDP, is expected to remain dynamic. Remittances will continue to sustain demand, as will the agricultural sector, which employs half the economically active population.
Nonetheless, the export of textile products is likely to be hit by sluggish world demand and worsening price competitiveness. Meanwhile, after suspending its Generalized System of Preferences for Bangladesh following the collapse of the Rana Plazza in April 2013, the United States has just confirmed that it will not be restored. Despite the efforts made by Bangladesh, the improvements in working conditions for employees in the textile sector appear insufficient.
Finally, inflation is expected to remain high in 2016. Relative control over food prices and moderation in oil prices will, however, contain price increases.
Stronger external position
The 2015-2016 budget includes major spending plans and is based on ambitious growth and revenue assumptions. This budget prioritizes spending on education and infrastructure. However, it does not include measures aimed at broadening the tax base. Accordingly, the deficit and the public debt are likely to deteriorate in 2016, though remaining at moderate levels.
With regard to the external accounts, the current account balance is expected to recover in 2016, despite the constraints putting pressure on exports. This is because lower oil prices help reduce the country's energy bill. Moreover, remittances by expatriate workers are expected to stabilize.
In 2015, the foreign exchange reserves continued to rise, reflecting the Central Bank's intervention aimed at limiting the currency's appreciation against the euro. These reserves have grown three-fold since November 2011 and are now deemed to be at a satisfactory level (over 5 months of imports). The country's ability to withstand sudden capital outflows has thus significantly improved.
The IMF program, from which the country benefitted in 2012 following the balance of payments crisis, was subject to the implementation of banking system reforms. The banking sector was suffering from arbitrary risk management and lack of supervision. Steps have recently been taken to strengthen governance and improve risk management.
Fragile political appeasement
The January 2014 parliamentary elections took place against a backdrop of widespread violence. The Bangladesh Nationalist Party (BNP) – the opposition party – boycotted the elections as it disagreed with the electoral process. The ruling party (the Awami League) was re-elected under widely contested conditions. The situation returned to calm during 2014 until the BNP called for early elections, with the Awami League refusing to take part in any talks. On 5 January 2015, the anniversary of the 2014 parliamentary elections, the BNP called for a blockade of the country's transport system in order to force the holding of early elections. This blockade was accompanied by violent clashes with the police. Thousands of protestors were arrested, including senior BNP leaders. The violence claimed the lives of over 120 people and lasted until April. The opposition ended the strikes and the blockade but accuses the Awami League of wanting to transform Bangladesh into a one-party State. For its part, the government considers that the opposition is conducting acts of terrorism. There is reason to fear a stalemate and renewed violence. Nonetheless, the Awami League and the government enjoy public support according to a poll carried out between May and June 2015.