Bangladesh: Port development projects offer investor opportunities

31 May 2017

A number of opportunities will exist for foreign investors in Bangladesh’s infrastructure sector, in particular in port development projects. Improving port capacity is critical if Bangladesh is to maintain its status as a competitive trading partner. However, institutional weaknesses will elevate the risk of contract cancellations or project delays. A weakened security environment will elevate the risk of property damage, death and injury for companies operating in Dhaka.

Security Environment

Islamist terrorist attacks against groups including religious minorities, secular bloggers, security forces and foreign nationals will remain a risk in the medium term, particularly in Dhaka. The risk will be exacerbated by the Awami League-led government’s suppression of opposition parties, such as Jamaate- Islami, which will make militancy increasingly attractive. Islamic State (IS) has also developed a presence in Bangladesh. In July 2016, the group claimed an attack on a café popular with foreigners in the capital Dhaka, in which 20 people were killed. Whilst counterterrorism efforts have prevented any other major incidents since then, IS will continue to see Bangladesh as an attractive target. 

In March 2017, an IS-affiliated militant detonated a suicide bomb inside a military compound in Dhaka, wounding two security personnel. Attacks are most likely to involve small arms and improvised explosive devices, and will elevate death, injury and property damage risks for businesses operating in Bangladesh.

Trading Environment

Bangladesh will sustain robust economic growth in 2016/17, achieving a 7.1% expansion in real GDP. This will occur despite reduced export earnings from the ready-made garment industry, which accounts for 80% of total exports. Headwinds to the sector are largely a result of weak demand from key markets, such as the United States and the European Union. The government is anticipated to increase public spending in 2017 to support short term economic growth in the face of a weak external sector. 

The FY2016/2017 budget projects expenditure growth of around 31%. Additional spending will primarily target non-developmental expenditure, such as pay, subsidies and transfers. A projected 36% expansion in revenues will mitigate any significant expansion in the budget deficit in FY2016/17.

Sovereign credit risks are moderated by a favourable debt structure. Multilateral and bilateral funding constitutes 46% of general government debt and Bangladesh’s membership of the International Development Association means that most of this funding is held on concessional terms. As a result, whilst Bangladesh has posted consistent fiscal deficits over the last decade, it has not accumulated unsustainable debt levels. General government debt stood at 27.2% of GDP in 2016. 

Improved tax collection, a result of a Value-Added Tax (VAT) rise and changes to tax administration, will provide an upside to sovereign credit risk in 2017, enhancing the government’s capacity to withstand economic shocks and invest in infrastructure.

Investment Environment

The Bangladeshi government will take an accommodative stance towards investment in port infrastructure, given their strategic importance to the economy. Existing ports at Chittagong and Mongla are shallow-water facilities, which require large ships to transfer cargo to smaller vessels before bringing it to shore, causing delays which reportedly cost as much as USD 15,000 a day. Given that exported apparel accounts for 15% of GDP, improvements to port infrastructure will be critical if Bangladesh is to remain a competitive trading partner. 

The sector has received investor interest from major regional players, such as China, Japan and India. Japan International Cooperation Agency approved a USD 3.6 billion loan for the construction of a new deep-water port at Matabari Island.

Project delays may arise from the government’s poor implementation of its infrastructure spending plans. Bureaucratic rules around public procurement and inefficient cooperation between government departments mean that the government frequently fails to meet its spending targets. For example, in February 2016, Dhaka cancelled the Sonadia port project. Chinese companies had already completed a feasibility study and promised funding for the project. In FY2015/16, only 69% of the development budget was utilised. Similarly, whilst the FY2016/17 budget marked an increase of 17.9% to the development budget, actual spending in Q1FY2016/17 declined by 7.0% year-on- year.

Bangladesh: Port development projects offer investor opportunities

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In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Venezuela, Rwanda, Chile and Ghana, all of which have been the subject of recent enquiries from JLT's client base.

Bangladesh: Port development projects offer investor opportunities

The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.

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