Bangladesh Business Forecast Report Q4 2008

A Pivotal Period Ahead

Bangladesh is facing a pivotal period, both politically and economically. While the country has the potential to become a major emerging market over the coming years, following in the footsteps of neighbouring India, with which it shares several similarities, it also faces considerable challenges. A major economic take-off will be impossible without a credible political system, which is why the forthcoming general election in December will be so important. Meanwhile, regardless of which party wins that election, the next government will have to grapple with a host of cyclical and structural weaknesses ranging from reduced global demand for textiles to chronic corruption and underdeveloped infrastructure.

The December 2008 elections will be a landmark event for Bangladesh, marking a return to full civilian rule after a two-year interruption, during which the military held de facto authority. Although it is too early to predict the winner, we expect one of the two dominant political parties - the Bangladesh Nationalist Party and the Awami League - to prevail, meaning that the military-backed interim government will have failed to usher in a completely new political era. This could limit the scope for bold reforms. We also see a risk that the losing party will seek to contest the election result, potentially by mobilising its supporters on the streets. Were violence to break out, the military could be forced to retain power indefinitely.

The immediate challenges for the economy will be a weaker external environment (the European Union (EU) and US are Bangladeshs biggest export destinations) and high inflation, which has been brought about by record oil and very high food prices. That said, lower commodity prices will reduce inflation, and we forecast real GDP growth of 6.3% in FY2008/09 (July-June). We expect growth to accelerate to 6.5% in FY2009/10 as the global economy improves, and to 7.3% by FY2011/12, provided that the next government presses ahead with business-friendly pro-growth policies and attracts substantial foreign investment. However, we caution that mass unrest or another natural disaster (e.g. more floods and cyclones) poses a downside risk to our FY2008/09 forecast.

Bangladeshs 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 late 2008, the political scene remains in a state of flux, and this is delaying major investment decisions. Ironically, the crackdown on corruption which began in 2007 is being blamed for undermining business confidence, since local businessmen are coming under increased scrutiny. We expect the next government to be less committed to anti-corruption 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.