Bangladesh’s ready-made garment (RMG) sector will continue to drive strong economic growth of 7.5% over the next twelve months. Bangladesh will take advantage of the ongoing US-China trade war and reaffirm its status as an attractive global manufacturing source. Downside risks to foreign investment include lengthy and expansive bureaucratic procedures and the possibility of labour unrest over wage demands.
Terrorism risks will remain elevated in the one-year outlook. On 29 April and 26 May 2019, small improvised explosive devices (IEDs) exploded near local police units in Dhaka, injuring a total of five people.
The IED attacks in Dhaka were claimed by Islamic State (IS), after a two year lull in localised terrorist activity. Local media reported that the IEDs used in the latest attacks were not crude bombs, but battery-powered, suggesting an increased capability of terrorist organisations active in Bangladesh.
Infrastructure assets are susceptible to bomb attacks in Dhaka but the threat of attack will also remain acute in Khulna, Rajshahi and Rangpur divisions. In 2016, an IS attack on a café frequented by expatriates in downtown Dhaka resulted in 24 casualties.
Labour strikes at ports have also caused operational delays. In February 2017, light-vessel workers at the Port of Chittagong went on strike over wage demands, leaving as many as 90 vessels carrying commodities stranded as a result.
Bangladesh’s economic growth reached record highs of 7.9% in 2017/18, driven by strong growth in the RMG sector. Merchandise exports stood at US$7.1 billion in the first two months of 2019, an increase of 9.0% from the equivalent period in 2018. Merchandise imports averaged USD 5.5 billion in the first two months of 2019, growing by 9.7% year-on-year.
Total export values are forecast to reach USD 43.3 billion in 2019, up from USD 40.7 billion in 2018. The RMG industry will continue to benefit from low production costs, improved safety conditions at factories and trade disputes between the United States and China, which all leave Bangladesh well placed as an attractive alternative manufacturing location in 2019.
However, a slowdown in demand from developed western economies will begin to weigh on the medium-term Bangladeshi growth outlook, with GDP growth set to slow to 7.5% in 2019 and 7% in 2020.
Any significant economic growth slowdown in the United Kingdom under a hard Brexit scenario is likely to negatively impact Bangladesh. The UK accounts for 11.7% of total foreign direct investment (FDI) stock into Bangladesh, making it the second largest investor in Bangladesh after the United States.
The UK’s FDI stock is mainly concentrated in the garment and banking industry at 21.7% and 50.7% of the UK’s total investment in Bangladesh respectively. UK-based financial institutions are likely to relocate business processing operations away from Bangladesh to parts of the Eurozone over the coming years in order to minimise operational disruption.
Bangladesh offers significant investment potential in its deep sea port sector. USD 60 billion of annual trade flows through the country’s two existing seaports, Chittagong and Mongla.
However, both are too shallow for large container ship transit and require transfers to smaller vessels, adding an approximate cost of US$15,000 per day, and decreasing the port’s global competitiveness.
Under China's Belt and Road Initiative (BRI), investment in the development of new ports at Matabari and Payra has been approved, with the latter scheduled to become operational by 2022.
Investment in deep sea ports is essential to support Bangladesh’s export-oriented economy and realise its ambitions of becoming an upper middle-income country by the mid-2020s.
Bangladesh’s operating environment can be challenging for investors. Bangladesh performs poorly against regional peers with regard to the time and costs involved in resolving contract disputes.
On average it takes 1,442 days to enforce a contract in Dhaka and Chittagong compared with the South Asian average of 1,102 days.
Costs can be as high as 67% of the total claim, with legal fees forming the majority of the expenditure.
However, expropriation risks in Bangladesh are low. No foreign property has been expropriated since the Foreign Private Investment Act was introduced in 1980.
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.
5 Key Takeaways
- Bangladesh’s ready-made garment (RMG) sector will continue to drive strong economic growth of 7.5% over the next twelve months
- IED attacks against local police units in Dhaka in April and May 2019 injured 5 people
- Foreigners and religious minorities will be vulnerable to attacks in Dhaka, Khulna, Rajshahi and Rangpur
- Bangladesh’s trade balance returned to a surplus of USD 1.5 billion in February 2019
- Growth will slow down over the medium term as demand from Europe weakens and impacts the RMG and BPO sectors.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Gulf of Oman, Hong Kong, Kenya and Madagascar all of which have been the subject of recent enquiries from our client base.