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 countries most vulnerable 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 crumbling but not collapsing

Growth lost its steam due to the COVID-19 crisis. The country was in lockdown between March and May, resulting in the closure of factories and public places, and travel restrictions. The measures were lifted at the end of May, allowing economic and commercial activities to resume. The authorities are particularly vigilant regarding textile factories, where the environment and organization are favorable to the spread of the virus. As the textile industry accounts for 80% of exports and 13% of GDP, the COVID-19 crisis has severely penalized the sector due to the closure of factories but also the cancellation of orders from customers. The industry's ability to recover from the health and economic crisis will be a key element in stimulating growth and exports in 2021. The investment will also support recovery, particularly through the government's Annual Development Programme (ADP), which aims to develop infrastructure to fill the gaps in transport, education, water, and energy that limit production in export-oriented sectors. The demographic situation (low labor costs, young population) attracts foreign investors, but the weakness of the banking system is a brake on investment expansion (FDI represents less than 1% of GDP). The inclusion of Bangladesh in projects (ports and roads in particular) within the framework of the Silk Roads in recent years has strengthened already substantial Chinese investments. Inflation will remain stable, but relatively high, due to strong demand pressures linked to the recovery of private consumption (70% of GDP), poor harvests (linked to major floods in July 2020) and the accommodative monetary policy aimed at providing liquidity to the economy.

Twin deficits contained despite the crisis

In addition to the increase in spending to combat COVID-19 (purchases of medical equipment, increase in social transfers and subsidies), infrastructure investments under the ADP (about 30% of spending), such as the Dhaka metro or the Rooppur nuclear power plant, will continue to weigh on the government budget. Tax revenues, limited by a narrow income tax base, make up less than 10% of GDP. However, the new VAT regime, in force since July 2019, should allow them to increase once activity returns to pre-crisis levels. The level of public debt will remain sustainable according to the IMF (more than 60% is concessional debt). Commercial banks are characterized by a high non-performing loans ratio, particularly government-owned banks (where the ratio exceeds 30%), which could threaten financial stability.

Regarding the external accounts, the trade balance (-5.5% of GDP) is structurally in deficit due to the country's dependence on imports (capital goods, energy, and cotton). Exports, driven by the competitive and expanding ready-to-wear segment, have picked up but remain dependent on the economic situation of its trading partners and the evolution of the health crisis (the European Union and the United States are the recipients of 43.5% and 19.3% of exports, respectively). Workers' remittances (5,6% of GDP), which had been affected by the decline in activity in the Middle East, have resumed since July 2020 and will partially offset the trade deficit. The current account deficit will continue to be financed by increasing FDI and international aid. Foreign exchange reserves provide a satisfactory safety net, representing about 5.5 months’ worth of imports.

Fragile political stability despite continuity at head of state level

The country has suffered several military coups since its creation in 1971. Political stability is vulnerable to tensions between the ruling Awami League (AL) and the Bangladesh Nationalist Party (BNP). 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. BNP leader Khaleda Zia, sentenced to prison in 2018 for corruption, was released on medical grounds in March 2020 for 6 months (extended to March 2021) on the condition that she remains in Dhaka and receives treatment. The AL, in power since 2009, won almost all the seats in the legislative elections at the end of 2018. However, this will not end the risk 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.

Beyond the fight against COVID-19, the main governance challenges will remain poverty and development. The government, under the "Vision 2041" plan, is setting objectives aligned with the country's ambitions to become an upper-middle-income country with a GDP per capita of between USD 4,000 and USD 12,500 (World Bank definition) by 2031 and a high-income country by 2041. The Rohingya refugee crisis is a growing issue as the situation is bogged down. Internationally, Bangladesh will continue to focus on relations with China and India.

Source:

Coface (02/2021)
Bangladesh