Bangladesh Business Forecast Report Q1 2012
Includes 3 FREE quarterly updates
Core Views
We continue to believe that the Bangladeshi economy will face a cyclical slowdown in the current fiscal year (FY 2011/12, July-June) as significantly tighter credit conditions keep a lid on economic activity. We are currently pencilling in a slowdown to 5.9% (from 6.7% in FY 2010/11).
Apart from government expenditure, we expect all components of GDP to undergo some semblance of moderation. Broadly speaking, the economy is expected to slow on domestic and external fronts. The country’s current account balance looks set to return to deficit territory after seven years in surplus. Coupled with insufficient remittance inflows, weakening export growth should see the balance record a deficit of US $1.3bn (or 1.1% of GDP) in FY 2011/12, down from US $1.0bn in FY 2010/11.
In terms of monetary policy, we continue to hold to our view that Bangladesh Bank will pause on further rate hikes, despite the fact that consumer price inflation has been more sticky than we previously forecast.
Major Forecast Changes
We downgraded our FY 2011/12 real GDP growth forecast from 6.3% to 5.9%, owing mainly to a downgrade of our private consumption outlook from 6.0% to 4.5%.
Our earlier expectations were for a marginal widening of the current account surplus this fiscal year. However, on the back of downward revisions to our export and remittance growth outlooks, we now see the current account balance heading back into deficit territory.
Key Risks To Outlook
Downside Risks To Growth: We highlight that risks to our interest rate forecasts are heavily weighted to the upside. Hence, our 5.9% outlook on growth may face further downside revision.
Upside Risks To Interest Rate Outlook: As mentioned above, risks to our outlook are heavily weighted to the upside. At such elevated levels, the central bank will continue to face pressure to curb seemingly runaway inflation. Furthermore, Bangladesh Bank’s continuing pursuit of the government’s impossible goal of 7.5% average inflation could mean more hikes in the near term. From the perspective of exchange rate stability, a hike could help stem the ongoing weakness of the Bangladeshi taka. We further highlight that the bank’s real repurchase rate remains deep within negative territory, suggesting further scope for more hikes.
Core Views
We continue to believe that the Bangladeshi economy will face a cyclical slowdown in the current fiscal year (FY 2011/12, July-June) as significantly tighter credit conditions keep a lid on economic activity. We are currently pencilling in a slowdown to 5.9% (from 6.7% in FY 2010/11).
Apart from government expenditure, we expect all components of GDP to undergo some semblance of moderation. Broadly speaking, the economy is expected to slow on domestic and external fronts. The country’s current account balance looks set to return to deficit territory after seven years in surplus. Coupled with insufficient remittance inflows, weakening export growth should see the balance record a deficit of US $1.3bn (or 1.1% of GDP) in FY 2011/12, down from US $1.0bn in FY 2010/11.
In terms of monetary policy, we continue to hold to our view that Bangladesh Bank will pause on further rate hikes, despite the fact that consumer price inflation has been more sticky than we previously forecast.
Major Forecast Changes
We downgraded our FY 2011/12 real GDP growth forecast from 6.3% to 5.9%, owing mainly to a downgrade of our private consumption outlook from 6.0% to 4.5%.
Our earlier expectations were for a marginal widening of the current account surplus this fiscal year. However, on the back of downward revisions to our export and remittance growth outlooks, we now see the current account balance heading back into deficit territory.
Key Risks To Outlook
Downside Risks To Growth: We highlight that risks to our interest rate forecasts are heavily weighted to the upside. Hence, our 5.9% outlook on growth may face further downside revision.
Upside Risks To Interest Rate Outlook: As mentioned above, risks to our outlook are heavily weighted to the upside. At such elevated levels, the central bank will continue to face pressure to curb seemingly runaway inflation. Furthermore, Bangladesh Bank’s continuing pursuit of the government’s impossible goal of 7.5% average inflation could mean more hikes in the near term. From the perspective of exchange rate stability, a hike could help stem the ongoing weakness of the Bangladeshi taka. We further highlight that the bank’s real repurchase rate remains deep within negative territory, suggesting further scope for more hikes.
Contents
Executive SummaryCore Views
Major Forecast Changes
Key Risks To Outlook
CHAPTER 1:POLITICAL OUTLOOK
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
Significant Dangers In 2012 And Beyond
As the Belarusian economy remains mired in a severe financial crisis, the political administration faces severe political headwinds over the medium term. Not only does the prospect of political dissent remain high in light of the deteriorating macroeconomic outlook, but the risk of becoming overdepenedent on financial aid from Moscow has similarly risen. Similarly, while efforts have been made to improve the country’s business environment in the past year, corruption remains a major impediment for the investment climate.
TABLE: Political Overview
Long-Term Political Outlook
The Balancing Act Will Continue
Belarus’s long-term political stability is in jeopardy due to the country’s lack of institutional development beyond the executive branch.
Consequently, while our core scenario is for President Alexander Lukashenko’s regime to maintain its grip on power over the long term, we do not rule out the possibility of growing public dissatisfaction resulting in a sudden change of leadership or direction, particularly in light of the country’s recent economic crisis. We believe the country’s greatest challenge over the coming decade will stem from the regime’s efforts to diversify its foreign policy agenda while maintaining strong links with Russia.
CHAPTER 2: ECONOMIC OUTLOOK
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Slowdown Due In 2012
While Belarus’ strong economic performance in the first half of 2011 will ensure full-year growth of 4.5%, economic activity is nonetheless slowing sharply. Owing to the negative effects of the massive depreciation of the ruble in 2011, household demand and business activity will remain weak in 2012, supporting our real GDP growth forecast of 2.2%. Moreover, while Russian financial support has helped alleviate near-term external financing pressures, this has the potential to weaken political appetite for a rebalancing of the economy.
TABLE: ECONOMIC ACTIVITY
TABLE: CURRENT ACCOUNT
Balance Of Payments
Near-Term Financing Pressures Easing
In light of the massive depreciation of the ruble in 2011, Belarus’s current account deficit is expected to correct sharply over the medium term. Moreover, Moscow’s commitment to support Minsk via lower gas import payments and soft loans has helped alleviate near-term pressures on Belarus’s external financing needs. However, at the same time, this development serves to heighten Belarus’ economic dependence on Russia as well as limiting scope for economic reform.
TABLE: MONETARY POLICY
Monetary Policy
Tighter Policy Urgently Needed
Owing to the massive sell-off in the Belarusian ruble witnessed in 2011, consumer price inflation in the country will remain close to tripledigit territory over the next few months. In order to stabilise the economic situation and begin to bring inflation lower in 2012, authorities will need to tighten monetary and fiscal policy considerably from current levels, which in turn will exact a heavy economic toll on the domestic economy.
Regional Banking Sector
CEE Risks Rising
Higher capital adequacy ratio requirements and sovereign mandates for banks to retrench in Western Europe are likely to feed through to weaker funding to the Central and Eastern Europe (CEE ) region. We caution that there is a high risk of a credit crunch in CEE .
CHAPTER 3:10-YEAR FORECAST
The Polish Economy To 2021
Economic Liberalisation To Raise Growth Potential
While Belarus’ short-term macroeconomic environment has worsened dramatically in light of the recent devaluation of the ruble, we remain relatively upbeat about Belarus’ long-term growth potential on the back of rising FDI inflows and increasing exports. We also expect the country to pursue a modest degree of political liberalisation, although we caution that meaningful democratisation is unlikely and that Moscow will remain Minsk’s principal trading partner.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
CHAPTER 4: BUSINESS ENVIRONMENT
SWOT Analysis
BMI Business Environment Risk Ratings
Business Environment Outlook
Introduction
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS
TABLE: BMI LEGAL FRAMEWORK RATING
Infrastructure
Market Orientation
TABLE: LABOUR FORCE QUA LIT Y
TABLE: EMERGING EUROPE – ANNUA L FDI INFLOWS
TABLE: TRADE AND INVESTMENT RATINGS
TABLE: TOP EXPORT DESTINATIONS , 2002-2009
Operational Risk
CHAPTER 5: BUSINESS ENVIRONMENT
Global Outlook
Eurozone Break-Up Risks Rising
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPE D STATES REAL GDP GROWTH FORECAST
TABLE: REAL GDP GROWTH CONSENSUS FORECASTS
TABLE: EMERGING MARKETS REAL GDP GROWTH FORECAST
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