Growth Upswing In Critical Election Year
BMI View: Contrary to our earlier expectations that real GDP growth would stabilise this fiscal year (FY2012/13 [July-June]) from the slowdown witnessed in FY2011/12, economic data so far this year has been surprisingly soft. As such, we have downgraded our real GDP growth forecast for FY2012/13 to 6.1%, from 6.3% previously. Looking ahead into FY2013/14, we believe that an upturn in economic activity should take place in Bangladesh given easing credit conditions and the improving external demand outlook. We are forecasting full-year real GDP growth of 6.5% for the upcoming fiscal year.
FY2012/13 To Mark Second Year Of Slowdown…
Contrary to our earlier expectations that Bangladeshi economic growth would stabilise this fiscal year (FY2012/13 [July-June]) from the real GDP growth slowdown witnessed in FY2011/12, economic data so far this year has been unexpectedly soft. In particular, we highlight the ongoing contraction in import growth and the continuing slowdown of private sector credit growth. Year-on-year (y-o-y) import growth has been negative for ten out of the past twelve months (up to December 2012), averaging -5.9% during H1 FY2012/13. Meanwhile, private sector credit growth has slowed to a fresh multi-year low of 16.6% y-o-y as of December - well below the 29.1% peak hit in March 2011. As such, we have decided to marginally downgrade our full-year real GDP growth forecast for the current fiscal year to 6.1%, from 6.3% previously, marking the second consecutive year of slower economic expansion since the peak rate of 6.7% in FY2010/11.
Despite the enduring growth soft patch in Bangladesh, we highlight that the country remains an outperformer in its immediate region, with South Asia real GDP growth projected to average 5.6% during the 2012-2013 period.
|Bangladesh - M3 Money Supply, % chg y-o-y|
…But Growth Upswing In Critical Election Year (FY2013/14)
Looking ahead into the upcoming fiscal year (FY2013/14), we believe that an upturn in economic activity should take place in Bangladesh, with full-year real GDP growth projected to rise to 6.5%. We highlight that broad money supply (M3) growth looks to have moved past its cyclical lows, suggesting that an economic recovery in the country is within sight. As seen in the accompanying chart, M3 growth has risen gradually to 17.0% y-o-y as of December 2012 from the May low of 15.0%. Two key tailwinds are expected to drive this upturn in the country's credit and investment cycle.
|Entering A New Period|
|Bangladesh - Interest Rates, %|
Firstly, after 2.5 years (from mid-2010 to end-2012) of tightening monetary policy by Bangladesh Bank (BB) and the resulting sustained rise in credit costs, the pressure on businesses on this front should start to materially ease following the central bank's decision to reverse its hawkish policy stance earlier this year. The central bank's most recent tightening cycle saw a cumulative 325 basis points (bps) worth of policy rate hikes. However, BB decided to cut its benchmark policy rates by 50 basis points (bps) in January, taking its repurchase rate down to 7.25%. Commercial lending rates have started to edge down, with the weighted average lending rate standing at 13.73% as of January - 22bps down from its recent peak ( see chart). At the moment, we expect a further 50bps worth of additional policy rate cuts from the central bank.
|Better Days Ahead|
|Bangladesh - Exports, US & EU Real GDP Growth|
Secondly, despite an abysmal 2012, when export growth averaged in the low single-digit territory, the external demand conditions for Bangladesh's exporters should brighten up noticeably over the coming twelve to eighteen months. The country's two largest export markets are the EU and the US, with both trading partners making up for roughly 50% and 20% of total export earnings, respectively. Our global macroeconomic assumptions see EU full-year real GDP growth rising to 0.3% this year (from the 0.4% contraction registered in 2012), before improving further to 1.4% in 2014. Similarly, US growth is projected to tick up to 2.3% and 2.5% in 2013 and 2014, respectively. Leaving aside the still-sluggish import growth numbers, trade data of late has been somewhat encouraging, with the six-month moving average of export growth having risen to 8.7% y-o-y as of January - up markedly from the -3.8% trough registered in August 2012.
In addition, we highlight that remittance inflows have remained robust, which bodes well for private consumption growth going forward. Total inflows in the first seven months of the current fiscal year are up a healthy 19.7% y-o-y to US$8.7bn, with the twelve-month moving average of year-on-year growth having risen steadily from the 2.2% low recorded in January 2011 to 15.6% as of January 2013.
Mindful Of Elevated Political Risks
Even more so than in recent years, businesses in Bangladesh look set to face a more turbulent political environment in FY2013/14, which poses downside risks to our real GDP growth projection of 6.5%. The potential spectrum of business-related political interference is likely to widen in our view, ranging from minor day-to-day operational disruptions due to sporadic eruptions of public unrest to the possibility of a complete change in the regulatory environment.
The nation has been embroiled in recurring episodes of violent unrest of late, with the ongoing war crimes trials for atrocities committed during the 1971 Liberation War splitting the country into two warring and determined sides. As these tribunals are still in the early stages of handing out their verdicts, the conflict they have engendered is unlikely to dissipate in the near term. Furthermore, a compromise on the restoration of the caretaker government system has yet to be reached between the opposition Bangladesh Nationalist Party (BNP) and the ruling Bangladesh Awami League (AL). The latter abolished this electoral procedure in 2011, with the former forcefully demanding its reinstitution ever since (e.g. via hartals/strike action).
On a related note, the ninth parliament's five-year tenure will come to an end by January 24, 2014, which means that general elections will have to take place within the next twelve months. With this comes the inherent uncertainty with regards to future policy direction. According to The Daily Star's January opinion survey, despite the AL's crushing defeat of the BNP in the 2008 elections, the country's two main political parties are practically neck-and-neck, enjoying 42% and 39% of the public's support respectively.
Real private consumption growth is expected to rise to 4.8% in FY2013/14 from a projected 4.3% this fiscal year, contributing 3.0 percentage points (pp) to headline growth. Private consumption makes up the lion share of the economy at approximately 75.0% of GDP.
Similarly, real public consumption growth is projected to increase to 9.3% in the coming fiscal year from a forecasted 8.8% in FY2012/13, with its contribution to headline growth staying flat at 0.5pp.
Gross Fixed-Capital Formation
Real gross fixed-capital formation is expected to witness an 8.3% expansion in FY2013/14, up from a projected 7.8% growth rate this fiscal year. The component's statistical contribution to headline growth is consequently set to rise to 2.4pp from 2.2pp in FY2012/13.
Finally, real export and import growth are projected to improve to 6.3% and 3.8% next fiscal year, from 5.8% and 3.0% in FY2012/13, respectively. This implies that net exports will add 0.6pp to headline growth in FY2013/14.