The Growth Story of Bangladesh

Bangladesh’s growth story is one that few saw coming. In the face of persistent challenges, the country’s stable economic growth has provided the bedrock for a prosperous future.

With a forecasted growth rate that’s only second to India, Bangladesh looks to stride towards middle income country status by 2021, banking on the shoulders of both established core industries such as the RMG sector as well as newer, rapidly growing sectors such as the ITES industry. The growing middle class, with its big appetite for consumerism, also has a large role to play in this future growth.

Bangladesh’s growth story is one that few saw coming. In the face of persistent challenges, the country’s stable economic growth has provided the bedrock for a prosperous future.

Strong Performance Relative to Emerging Countries

While many of its competitors have faltered and lost their ways, Bangladesh’s economy has held strong in the last decade with GDP growing by 6.1% per annum as of 2014. This growth is impressive, taking into account frequent instances of natural calamities and political unrest in this period which have at times hindered economic activity.

AVERAGE GDP GROWTH- 2015-2020

Inflation has remained stable over 2015 at 6.21% (Source: Bangladesh Bank) as the country has enjoyed a relatively stable political situation this year. Reining of inflation is attributed to declining growth of non-food inflation e.g. Rent, which has contributed to lower inflationary pressure. Bangladesh Bank has also adopted a tight monetary policy which has further led to lower inflation.

ADB Raises Growth Forecast for FY 15-16

This fiscal year, the Asian Development Bank is particularly bullish about Bangladesh’s economic prospects. The ADB has upgraded its FY 2015-16 GDP growth forecast for Bangladesh from 6.5% to 6.7%. This is notable as for the rest of the Asia Pacific (except Vietnam and Fiji) the ADB has downgraded its initial forecasts.

Moody Affirms Bangladesh’s Ratings with Stable Outlook

Bangladesh has performed well compared to other comparable countries and sovereign ratings by both Moody’s and S&P are testament to the economy’s resilience. The ratings are driven by a healthy economic outlook, progress on policy reform and limited vulnerability to fiscal and external funding stress. Local currency country risk ceiling is affirmed at Baa3, Long term foreign currency bond B2 and Bank Deposit ceiling at B1.

Bangladesh Economic Vitals are on Growth Trajectory

Bangladesh is experiencing record high forex reserve position, currently standing at USD 27 billion as of October 2015. The current reserve can comfortably cover 7 months of country’s import. This continued growth in Forex reserve is attributable to steadily improving RMG export, the stable exchange rate and satisfactory growth in remittance earnings.Exports have been growing based on the blossoming RMG sector which has clocked USD 25.49 billion in FY 14-15. Remittance revenues has grown to the tune of USD 12.8 Billion in 2015, albeit at a slower pace. However, import growth has declined at a relatively higher rate which contributed to positive current account balance.

Manpower export is also set to improve as the new opportunities are opening up in markets such as Japan and Thailand. Malaysia also continues to have high demand for Bangladeshi workers.

Influx in Infrastructure Development

The private sector is mainly involved in the power industry through rental power plants. Entrepreneurs have established quick rental power generation plants which have been regularly supplying to the national grid, contributing to lower electricity shortage.Government has been investing heavily in infrastructure developments, especially in the field of power generation. Since 2009, power generation capacity has more than doubled, increasing from 4,942 MW to 11,877 MW in 2015, with 68% of the population having access to electricity. Over the next five years, the government plans to increase power generation by 12,853 MW. The private sector will provide 40% of this increased electricity.

Government has been working to improve efficiency of the Chittagong Port which has the potential of doubling its capacity. In fact, in May 2015, the port handled 185, 684 TEU (twenty foot equivalent units) of import and export, the highest in the port’s 38-year history.

There also are long term plans of establishing a deep sea port in Sonadia and both Chinese and Indian investors have expressed interest in developing the sea port. Establishment of seaport can significantly reduce export lead times and earn steady flow of revenue for the government.

Growth in Consumerism Driven by Rising MAC Segment

A recent report by the Boston Consulting Group on Bangladesh’s growing middle class consumer segments highlights the exciting opportunities for B2C firms in Bangladesh that will emerge in the next decade. According to their research, over 60% of consumers expect their income levels to rise in the next 12 months. They represent the middle and affluent consumer (MAC) class: although currently they only account for 7% of the population, by 2025 that will increase to 19%. This translates to a market base of 34 million spread out over 61 cities in Bangladesh.

Although MAC consumers usually work within a budget, they want value for money and are less likely to be swayed by pricing decisions compared to their counterparts in other South Asian markets.

Overall, Bangladeshi consumers spend $130 billion annually, with a 6% annual growth in consumer spending. This huge consumer base is something that global consumer brands can hardly ignore.

Long Term Growth Oppurtunitites

Bangladesh is at the crux of “Chindia”. The close geographic proximity to these fast-growing economic powerhouses not only leads to strong trade relations but also gives access to potent market opportunities.

Furthermore, the shift in manufacturing in China as it moves out from low cost production to more value addition oriented production has created a gap that many emerging economies are scrambling to fill. Bangladesh is one of the better equipped countries with the capacity, access and cost-base to assume a leading role in this shift.

With competitive labor wage rates compared to other countries, Bangladesh is also set to continue its success story in the RMG sector. With product diversification and new markets in Asia the volume may well exceed USD 40 billion by 2020.

Additionally, Bangladesh has one of the lowest Public Debt to GDP ratios compared to other frontier markets – even India and Vietnam.

Although RMG provides the lion’s share of Bangladesh’s export volume, the country is rapidly diversifying into other sectors for exports as well. Non-RMG exports currently stand at 5.8 Billion USD and are exported to grow to 11 billion by 2025. This growth is driven by emerging sectors such as Light Engineering, Pharmaceuticals, Leather and IT.

Bangladesh has been experiencing increasing FDI over the last decade. FY 2014 inward FDI was USD 1.53 billion (highest in the manufacturing sector – USD 722.8 million). However, there is still room for much improvement, as the FDI to GDP ratio in Bangladesh (1.2%) is still well below the frontier market average (2.9%).

Diversification Opportunities in Capital Market

However, to their credit, Bangladesh capital markets have very low and even negative correlation with developed, emerging and other frontier equity markets. Therefore, an exposure to Bangladesh significantly improves risk adjusted returns.Bangladesh capital markets have developed steadily over time, although they still lack depth and breadth due to the absence of financial instruments such as derivatives.
However, to their credit, Bangladesh capital markets have very low and even negative correlation with developed, emerging and other frontier equity markets. Therefore, an exposure to Bangladesh significantly improves risk adjusted returns.

The market has returned 203% since Jan 2007 (16.33% p.a.). For long term investors looking to participate in the Bangladesh growth story – now is a good time to start investing.It is worth noting that 4 of the 5 largest stocks in December 2015 belong to the infrastructure or infrastructure sectors.