- We expect Bangladesh’s real GDP growth to slow to 7.2% in FY2018/19 (July – June), from 7.7% in FY2017/18, due to a likely moderation in garment export growth.
- However, the construction sector, which we expect to remain an outperformer in FY2018/19 due to the implementation of mega-projects, will likely continue to support growth over the coming quarters.
- We are revising our real GDP growth forecast for Bangladesh to 7.2% in FY2018/19 (from 6.8% previously). This is likely to be supported by strong construction activities. That said, our forecast reflects our expectation for a likely slowdown in ready-made garment export growth over the coming quarters.
Based on the government’s provisional estimates, Bangladesh’s real GDP growth is likely to have accelerated to 7.7% in FY2017/18 from 7.3% in FY2016/17, marking the country’s fastest growth rate in a decade.
The growth outperformance in FY2017/18 was primarily driven by the following factors:
- Large and medium scale manufacturing, which grew by 13.8% in FY2017/18, up from 11.2% the previous year,
- Construction, which grew by 10.1% in FY2017/18, up from 8.8% the previous year, and
- Services, which continued to print an impressive growth rate of 6.3% in FY2017/18, above its five-year average of 6.1%.
On the one hand, we believe that slower readymade garment (RMG) export growth is likely to act as a drag on the broad economy. According to media reports, Bangladeshi exports grew 5.8% in FY2017/18 on the back of surging garment exports (which account for 91% of total exports), supporting growth in large and medium scale RMG manufacturing. However, over the coming quarters, we expect rising global trade tensions to weigh on export growth to Bangladesh’s key RMG export markets such as the EU and the US.
Furthermore, a 42% surge in garment exports to India during FY2017/18 has prompted the Indian authorities to consider implementing a ‘rules of origin’ clause in its import policy. This move was considered so as to protect Indian garment producers from Chinese garment businesses seeking to bypass the high taxes levied by India on Chinese textiles by routing their products through Bangladesh, which India has established the South Asia Free Trade Agreement with. We expect the likely implementation of this clause over the coming months to slow Bangladeshi garment exports to India.
On the other hand, we expect real GDP growth to remain supported by the robust pipeline of mega infrastructure projects, and the fast-forward implementation plan. As outlined in the FY2018/19 Budget presented in June, ten mega projects worth at least BDT4.0trn (USD48.1bn), which include the Padma Multi-purpose Bridge, the Padma Rail Bridge, the Dhaka Mass Rapid Transit, the Payra and Sonadia sea ports, the Maheshkhali floating Liquid Natural Gas terminal project, and several large power projects have been put under the prime minister’s office for accelerated implementation. The planned outlay for the construction of physical infrastructure for FY2018/19 have also been increased to BDT1,440bn, from BDT1,262bn in the previous year.
Moreover, lower bank lending rates may provide a temporary boost to growth. As of July 1, private commercials banks should have lowered their lending rates to 9% for a tentative period of three months, from 10-16% previously, as instructed by the Bangladesh Association of Banks (see ‘Bangladesh’s Banking Sector Outlook To Remain Poor’, July 31). We expect the lower rates to spur higher loan growth and consequently investment and private consumption, providing a tailwind to the economy. However, the lack of a proper monitoring and enforcement mechanism suggests that implementation of this lending rate cut could be challenging.
Risks are weighted to the downside. Firstly, elevated political risk, as reflected by periodic outbreaks of mass social unrest in Bangladesh could discourage foreign investment despite the country’s cheap labour costs. Secondly, the country’s fragile banking sector – as a result of weak lending practices which have led to high levels of non-performing assets – also present significant risk to financial stability. Finally, rising oil prices would weigh on savings and investment, posing a drag on Bangladesh’s economic growth prospects.