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. - Source: Coface

Business Climate Rating

C
The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.

Strengths

  • Competitive garment sector thanks to relatively cheap labor
  • Substantial remittances from expatriate workers, mainly living in the Gulf States
  • International aid helps to cover financing needs
  • Moderate level of public debt
  • Favorable demographics: a third of Bangladeshis are below the age of 15
  • Improving financial inclusion through microfinance and mobile services

 

Weaknesses

  • Economy vulnerable to changes in the global competition in the textile sector and to developments in Gulf Cooperation Council countries
  • Very low per capita income and low participation of women, despite progress made
  • Recurring and growing political, religious, and social tensions
  • Business climate shortcomings and lack of infrastructure
  • One of the most vulnerable countries to climate risk: recurring natural disasters (cyclones, severe floods, landslides) resulting in significant damage and crop losses
  • Fragile banking sector: many non-performing loans on banks’ balance sheets

Current Trends

Growth set to accelerate

Growth should pick up momentum in FY2022, but headwinds will likely persist due to a slow vaccination pace. The country relies on the COVAX program, which has experienced vaccine shortages. This will delay COVID-19 herd immunity and push the government to impose strict measures to contain outbreaks. That said, exports (12% of GDP) rebounded in FY2021 and are expected to expand and reach pre-COVID-19 levels, thanks to robust demand from major trading partners, especially for the garment industry, which accounts for 80% of exports and contributes to 20% of GDP. However, rising freight costs and raw materials prices might hamper the recovery. Overseas remittances should continue to support growth in private consumption (69% of GDP) but are expected to slow down, reflecting a high base. They will also depend on workers' vaccination rate, which is essential to work in destination countries and to maintain robust inward remittances.

 

Investments (30% of GDP) will continue to support recovery, primarily through the government's Annual Development Program (ADP), with large-scale public infrastructure projects to improve transport, education, water, and energy that limit production in export-oriented sectors. Low labor costs and a young population will continue to support the domestic manufacturing industry in maintaining competitive prices. This will attract more foreign companies to source their capacities in the country. However, the vulnerability of the banking system, especially the state-owned commercial banks, which are undercapitalized, will restrain investment expansion. Due to higher global oil and commodity prices, inflation will remain relatively high. However, a favorable outlook in agriculture with improved winter crop harvest should limit inflationary pressures.

 

The return of twin deficits

In addition to COVID-19-related spending (social transfers and subsidies), infrastructure investment under the Annual Development Program (30% of total expenditure), such as the Rooppur Nuclear power plant or the Matarbari coal-fired power plant will continue to weigh on the government budget. Tax revenues, limited by a low-income tax base, account for less than 10% of GDP. The level of public debt, with the external share accounting for 22% of GDP, will remain sustainable according to the IMF (more than 60% is concessional debt). However, commercial banks, mainly state-owned commercial banks (SOCB), are vulnerable and could threaten financial stability – their capital adequacy ratios are below the 10% national threshold and the Basel minimum of 8%. The SOCBs are asked to carry out government mandates such as performing public policy roles, extending loans to potentially risky borrowers, and providing services for the government without charges. Moreover, domestic banks are solicited to finance the public deficit.

 

On the external front, the trade balance has a structural deficit (-6.0% of GDP in FY2021), as the economy relies on imports (capital goods, energy, and cotton), which is unlikely to narrow in FY2022 due to high energy and cotton prices. Exports, driven by the competitive garment industry, remain dependent on the economic situation of its trading partners - the European Union and the United States are the recipients of 45% and 18% of exports, respectively. Workers' remittances (5.6% of GDP), which have reached pre-COVID-19 levels, will continue to offset the trade deficit partially. FDI and international aid will finance the current account deficit. FX reserves should remain adequate, accounting for about 9.6 months of imports.

 

Vulnerable political stability

The country has experienced several military coups since the Bangladesh liberation war in 1971. Despite tensions between the ruling Awami League (AL) and the Bangladesh Nationalist Party (BNP), the latter does little to increase its numbers in parliament (7/350 seats against 298 seats for AL), with poor freedom of speech making it even harder. The absence of clear opposition may lead to the government's complacency in policymaking. Despite a large majority in the parliament, the AL will continue to face risks of social unrest, with accusations of fraud hanging over the party. These risks, coupled with high levels of corruption, contribute to a poor business climate in Bangladesh. The AL is associated with independence and a more secular ideology than the BNP, linked to the legacy of the military dictatorship and a more traditional and stricter conception of Islam. This could result in friction between the Muslim majority of the population and minority religious groups, while the potential for workers' strikes and terrorist attacks remains.

 

The government will also continue to face poverty and development challenges. The "Vision 2041" plan sets objectives to eradicate extreme poverty and to become an upper middle-income country by 2031 with a GDP per capita between USD 4,000 and USD 12,500 (according to the World Bank) and a high-income country by 2041.

Source:

Coface (02/2022)
Bangladesh