Bangladesh Business Forecast Report Q3 2009

Bangladesh begins the new fiscal year (FY2009/10, July-June) on a more stable footing than the previous year, but there are lingering uncertainties. Although the government of Prime Minister Sheikh Hasina holds a substantial majority in parliament, it faces several key political and economic challenges that could undermine its popularity. Thus far, the economy has proved highly resilient, barely slowing amid the global recession. However, economic growth is likely to slow belatedly in the new fiscal year, and the government's focus on political issues could divert its energies away from economic challenges.

Sheikh Hasina's administration has a substantial majority in parliament, but nevertheless faces key political challenges. Firstly, civil-military relations will remain strained by the fall-out from the Bangladesh Rifles (BDR) mutiny in February 2009. Secondly, the government's decision to prosecute those accused of war crimes during Bangladesh's war of independence in 1971 will re-open old wounds. Thirdly, Islamist militants remain a security threat, especially with several Islamist leaders being tied to the war crimes process. Finally, Hasina's government will be tested by an anticipated slowdown in the economy. A key risk is that the government's busy political agenda will distract it from 'bread and butter' economic issues.

Bangladesh's economy is proving highly resilient, with the Bureau of Statistics estimating real GDP growth of 5.9% in FY2008/09. Growth is being supported by a high degree of private consumption, still strong growth in workers' remittances, a robust agriculture sector, and greater political stability. Nonetheless, BMI believes that Bangladesh is lagging the global economic cycle, and will thus experience a modest slowdown in FY2009/10, with the economy growing by 5.5%. The government's ambitious FY2009/10 budget contains a number of measures to boost social welfare and agriculture, which should mitigate the impact of the global recession on ordinary Bangladeshis.

Meanwhile, with inflation contained, we expect the central bank to ease monetary policy to support businesses, while keeping the taka currency stable. The main downside risk to Bangladesh's growth would stem from weaker remittances or a double-dip US recession.

Bangladesh's long-term growth prospects are constrained by its weak business environment, which suffers from very high levels of corruption, poor infrastructure, and an unskilled labour force.

As of June 2009, the political situation appeared stable, but some foreign investors are likely to adopt a 'wait and see' attitude regarding the Hasina government's policies, and this may delay major investment decisions. The future of the crackdown on corruption that began in 2007 looks uncertain following the resignation of the anti-corruption commission in April 2009, and we expect the government to be less committed to such probes. Nonetheless, Bangladesh is slowly emerging on global investors' radars as a 'frontier market'. Its vast population, low-cost labour and strategic location adjacent to India and China make it a potentially attractive destination