2012-11-14 22:10:57 - Bangladesh Business Forecast Report Q4 2012 - a new country guide report on companiesandmarkets.com

The decision by the World Bank to cancel a US$1.2bn loan for the Padma Bridge is a new nadir for the long-delayed project. We believe that this loan cancellation will lead to further delays for the Padma project and could dampen the appetite of other major foreign donors over the coming years. Public unrest owing to heightened tensions between the governing Bangladesh Awami League (BAL) and the main opposition, the Bangladesh Nationalist Party (BNP), is unlikely to subside as both parties continue to confront each other regarding the restoration of the caretaker government system.

In FY2012/13 (July-June), we expect domestic macroeconomic conditions to be more stable and supportive and we believe the economy will gradually pick up. Our 6.3% real GDP

 

 

growth forecast remains below consensus as we are still concerned about the likelihood of the bleak external environment offsetting some of the domestic gains. The government announced in its FY12/13 budget speech that it has selected seven sites for establishing new economic zones under the Bangladesh Economic Zones Act 2010. The introduction of these areas should bode well for Bangladesh´s long-term economic outlook.

Due to the diplomatic confusion between Bangladesh and the UAE regarding the ban (or lack thereof) on migrating Bangladeshi workers, the recovery in overseas employment opportunities and remittance inflows in recent years could reverse rapidly. Although second to Saudi Arabia in terms of the source of the most remittance inflows, the UAE has been the top destination for Bangladeshi labour over the past few years. Bangladesh Bank (BB)´s latest biannual monetary policy statement confirmed our expectations for a more dovish stance from the central bank. Looking at tits specific targets on money supply and credit growth, we believe dovish measures will be necessary to arrest their current downward trends.

Major Forecast Changes

The government decided to revise the base year for the calculation consumer price inflation (CPI) to 2005/06 and change the weights of the basket, resulting in a large one-off fall in the headline inflation rate. Regardless of this drop, our view for continued disinflation and for BB to soon reverse its two-year-long hawkish stance on monetary policy is unchanged. For our purposes, we are sticking to the 1995/96 CPI index until we obtain more readings of inflation based on the new weights over the coming months. That said, this measure will expire by December 2012.

Key Risks To Outlook

Downside Risks To Growth: We highlight that the government´s reliance on debt will continue to be a cause for concern, given the associated inflationary and crowding out risks

Downside Risks To Current Account Outlook: A bigger than expected contraction of the EU economy could mean export growth falls even further. We also note that rising global commodity prices are still a key threat to the country´s imports bill.

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