Bangladesh
KEY ECONOMIC INDICATORS (2016)
Population 163 million
Per Capita GDP $1,359
GDP Growth 7.1%
Current Account -0.23% GDP
Inflation Rate 5.6%
Unemployment Rate 4.1%
Fiscal Deficit -4.7% GDP
Debt to GDP 27.2%
FX Rate 82.4 BGT/USD
Benchmark Rate 6.8%
Recommendation: Overweight
Bangladesh’s high economic growth make the country a great investment opportunity as it will continue to develop.
I believe the Bangladesh is a good investment. It’s current economy is characterized by high consistent economic growth (especially in the lower classes), which will lead to increased labor opportunities and consistent growth in the country’s GDP.
Economic Growth .
The GDP for Bangladesh has nearly tripled in the past 20 years. In 2016, the country had a GDP per capita of $1,359 (USD). According to IMF, Bangladesh was the second fastest growing economy with a growth rate of 7.1% annual positive change within the past year. This is also the fastest growth the country has seen in over 30 years designating its business cycle as a relatively high expansionary cycle. According to sources, the potential GDP growth rate as of April 2017 is 6.9%, indicating that the economy may be slowing down slightly from 2016 with a 0.2% decrease in GDP, however, it will be the seventh year in a row with GDP growth of over 6%. There has also been growth in areas such as personal disposable income.
Natural resources in Bangladesh include Water, Fish, Forest, Coal, Petroleum, oil, and natural Gas. I was unable to find sources with which to quantify these natural resources. Many of which resources I believe have not been fully accessible or have been analyzed to their potential until recently as there is evidence of abundant natural resources, but it has not been utilized or extrapolated from the earth. In April 2017, they signed 22 agreements with India in sectors such as defense and nuclear stability.
In early 2016, Bangladesh’s Finance Minister AMA Muhith spoke at a Bangladesh investment summit highlighting some of the strengths that Bangladesh offers to investors. In his speech he said, “In view of last six years' performance, we have set a goal. We want to see Bangladesh as a developed economy by 2041 — a very ambitious target. If you look at history, it has taken much more time to reach the current status.”
In 2016, the inflow of foreign direct investment into Bangladesh rose 27% to $1.45 billion. This money has been cycled into industries such oil and gas, banking and telecommunications. These investors have mostly come from the US, UK, China, Singapore and South Korea. However, the largest growth sector has come from the garment industry which, as 80% of their current total exports, has been instrumental in drastically decreasing their poverty and unemployment which has nearly halved since 1990. According to most estimates, the Bangladeshi FDI return in 2015 was more than 14% in terms of USD.
The country has already received great interest as far as other foreign governments investing in their economy as they have also received much aid to improve their currently struggling infrastructure. This aid includes a 4.5-billion-dollar credit for development projects, as well as a metro rail project funded by the Japanese government. The inflow of private foreign direct investment into Bangladesh rose 27.2% to $1.5 billion during 2016, according to central bank data
Business Cycle .
Bangladesh is currently in the expansionary phase of the business cycle. They have been in the expansionary phase for around 6 years. This is evident by their growth in GDP, and lowering employment rate from 4.5% in 2012 to 4.1% in 2016. Another tell of their expansionary tendencies is how consumer wealth is dispersing beyond the major cities. The suburbs and outer villages have grown in wealth as the lowest class is seeing the most significant monetary growth (incomes for the lowest 40% of the country grew 0.5% faster than the country as a whole). It is estimated that within the next decade, the country will have 63 cities with Middle-class and affluent consumer (MAC) populations of over 100,000 people compared with the 36 now. As well as the fact that 60% of consumers said that they expect their incomes to raise over the next 12 months.
Monetary Policy & Fiscal Policy .
Central Bank Governor Fazle Kabir recently stated that the central bank’s policy interest rate would be held constant at 5.75%. Meaning that The Central bank also said it would take initiatives to finance “MSME” (micro, small and medium enterprises) especially focused in the manufacturing, service, and agricultural sectors. This is one potential area of growth for investors seeking to fund those types of businesses in Bangladesh. The central bank also stated that they would focus on price stability, economic growth, and employment generation (other good signs for investor interest). By balancing the output and inflation risks for the economy over the next year, the program will target monetary growth to keep inflation around 5.5 percent as the country is currently in an expansionary phase.
Government Spending to GDP averaged 14% in 2016 and it is projected to be 14.1% in 2017. The standard rate of VAT is 15% levied on transaction value of most of the imports and supplies of goods and services. The top corporate rate was 45%. However, publicly traded companies registered in Bangladesh are charged a lower rate of 27.5% which could be useful for investors to understand to know how much the companies they are investing in will be taxed.
Bangladesh recorded a Government Budget deficit equal to 4.7% of the country's GDP in 2016. Government Budget in Bangladesh averaged -3.3% of GDP from 1991 until 2016, reaching an all-time high of -1.3% of GDP in 1993 and a record low of -4.0% of GDP in 2015.
Its central bank is the first in the world to establish a hotline dedicated to citizens to complain about any banking related problem. They are also the very first bank in the world to issue a “Green Banking Policy” which is a bank concerned with social, ethical, and environmental loans and investments, which could be beneficial to investors seeking to build value in sustainable businesses located in Bangladesh.
Trade and Capital Flows .
Exports
In 2015, Bangladesh exported $35.7 billion worth of goods (roughly 16% of GDP). It is a major world producer of garments and textiles as a byproduct of a 1970’s US quota on Korean Textiles where many companies moved to Bangladesh to navigate around the quota. Bangladesh has since picked up on practices and strategies to now export over $26 billion of garments and textiles (80% of their total exports), making them the second largest producer in the world, up 10% from around $23 billion in 2015. They also have a small percentage of their exports coming from things such as wheat and refined petroleum. It’s top export destinations are the United States ($6.2B/roughly 22% total exports), Germany ($5.2B/roughly 14% total exports), the United Kingdom ($3.5B/roughly 10% total exports), France ($2.4B/roughly 6.7% total exports) and Spain ($2.3B/roughly 6.5% total exports).
Imports
In 2015, Bangladesh imported $38.3 billion worth of goods (17.33% GDP). Bangladesh’s top exports are Machinery, at $5.3 billion (13.1% of total imports), Cotton at $4.6 billion (12% of total imports), Electrical Machinery with a value of $3.1 billion (9% of total imports), and $2 billion worth of iron and steel (5% of total imports). It is important to note that 9/10 of Bangladesh’s top imports are goods related to manufacturing, with 5/10 relating to garment manufacturing. Bangladesh has an unfavorable balance of payments for many years due to its dependency on imports with the current account balance at -$451 million USD (0.23% of GDP)
Tariffs and Quotas
Bangladesh’s trade is characterized by high import tariffs and no import quotas. Customs duties are levied on all imports except capital machinery, raw materials for medicine, poultry medicine, feed and machinery, defense equipment, chemicals for leather and leather goods, private power generation units, textile raw materials and machinery, solar power equipment, relief supplies, fire doors for garment factories and goods for disabled people. There are three tiers of tariff prices: Tier one covers certain machinery and basic raw materials at a 0-6% rate, tier two covers intermediate products at a 7-13% rate, and tier three taxes finished goods at a 14-25% goods. Bangladesh is not part of a trading bloc.
Currency .
The national currency for the country of Bangladesh is the Taka, designated by a
code of BDT. The current exchange rate is 82.4 BGI/USD. The country’s inflation rate was 5.6% in 2016. It has a 10-year average inflation rate of 6.6% with that number gradually dropping since 2011 where the inflation reached highs as much as 16%. The most important categories in the CPI are food, beverages, and tobacco which make up 59% of the total rate. Bangladesh has a history of high inflation rates on food prices; in 2008 food prices inflated by 34-55% causing large problems for the lower class as well as the country in whole.
Bangladesh uses a “managed float” approach where the nominal exchange rate is set by market forces, but keeps discretion of central bank to interfere in the market to keep the rate at a certain limit. As such, the central bank has recently announced the monetary policy statement fixing the inflation rate at 5.5% (at the same as the inflation rate targeted by the government in their budget).
Portfolio Recommendation .
Bangladesh has many strengths that create excellent investment opportunities. Some of these are: open and diversified economy, abundant cheap labor, strategic location as a gateway to the countries of the Asia-Pacific region, legislative framework favorable to business and a large focus on the environment were the government provides incentives for environmentally sustainable business practices. The country has the advantage of being in a strategic geographical position between South and Southeast Asia, where it enjoys the presence of many shipping ports and a large population of consumers. In addition, its domestic consumption continues to grow as the poverty level decreases at an extraordinarily quick rate making the country a good candidate for investment.
Recommended sectors
I view Bangladesh’s lowering rate of Poverty as the biggest opportunity of investment. They have one of the fastest declining poverty rates in the world, combined with a rapidly increasing GDP and GDP per capita meaning the continued growth will demand greater infrastructure, capital, and consumption. The inflow of foreign direct investment into Bangladesh rose 27.19 percent year-on-year to $1.45 billion in the July-February period, according to central bank data.
Power Generation. Over the past 8 years, over $8 billion has been invested in the power sector resulting in access to electricity for almost 85 percent of the population, up from 47 percent before the period. To keep consistent with the countries goal to become a developed country by 2041, it will need to generate 46,000MW of power before this time which has an estimated $15 billion worth of investment. As the country continues to grow in other sectors, such as manufacturing and on a socioeconomic level, the demand for power will continue to grow at an even larger extent.
Manufacturing. Bangladesh already enjoys the presence of a robust manufacturing industry. However, a large amount of the manufacturing is related to the garment and textile industry. There is an opportunity to diversify the sector by investing in other forms of manufacturing such as tech manufacturing.
Shipbuilding. Manufacturing being an already robust industry in Bangladesh combined with the availability of shipping ports creates a unique opportunity to invest in shipbuilding. As the country’s GDP continues to see positive growth, there will be an increased demand for goods transportation and especially shipping as most of Bangladesh’s primary export locations lie overseas.
Infrastructure. As the country’s GDP continues to increase there will naturally be an increase in demand for infrastructure to improve the quality of the country’s transportation and logistical industries.
Other notable areas of potential investment include the leather industry, where there is already framework and supply currently producing 2-3% of the world’s leather goods, as well as the already established Garments & Textiles industry and Ceramics industry which I believe will continue to grow as lower class workers flow out of poverty and into the workforce.
Downside Risk
A number of factors act as impediments to investment, including weak infrastructure, inconsistent energy supply, lack of land, occasional strikes, weak financial sector, difficult bureaucracy system, slow judicial system and the absence of an effective mechanism for dispute resolution. On Friday, July 1, 2016 – group of attackers stormed a foreign-owned bakery and held 20 people hostages, all 20 died. This has led to many foreign businesses to question their investments and put an increased measure on security. Bangladesh has a serious problem with underdeveloped infrastructure creating a serious operational challenge with no short-term solutions, and their political instability has proven to be difficult when dealing with government regulations. Often bribes are paid to government officials; The Bangladesh Anti-Corruption Commission is the organization taxed with controlling this corruption, however, this agency is also often undermined by corruption. Another force leading impeding investment opportunities are strikes and counter-strikes often shut down the whole country. Another risk to consider when investing in Bangladesh as a country is the factor of diversification. A large majority of their import and export activity comes from the Garment industry, posing potential risks to the country’s economy should the sector fall.
A sound risk management approach in Bangladesh would be one that addresses problems dealing with both external and internal solutions. Investors should consider diversifying their money in different industries within Bangladesh as well as seeking out locations with recently improved infrastructure (or simply investing in infrastructure itself). Investors should also seek out opportunities to invest in companies/industries with strong government approval.