Analyst:

Asif Khan, CFA

asif@bracepl.com

More than four months has passed since the election that was held on January 5
th
.
It makes sense to take a look at how the economy has fared so far and what lies
ahead in the calendar year 2014.

Broadly, not much has changed since we wrote our strategy report at the beginning
of the year. The chances of an interim election in the next 12 months look slim.
Current account surpluses continue, currency looks stable and inflation remains
under control, largely due to weak demand. On the negatives, tax revenue fell short
of the target as per expectation. In our opinion, the major negative was the slower
pace of recovery of business activity post election.

The key factors to look out would be developments in the law and order situation,
business confidence, RMG exports/orders, health of the banking system and to a
lesser degree political situation (as due verdicts of war-crime may trigger fresh
street agitation and strikes).
GDP Growth still expected to be below 6%
Post election things have been quite stable in the political scene with the opposition
content to be sitting in the sidelines. However, business and consumer confidence
has not recovered as we would have wanted it. In particular, businessmen are still
wary of the political situation even with the absence of political violence.

According to the Center for Policy Dialog (CPD) an economic think-tank, this
happened because the election was a one-sided affair without wide participation.
They also mentioned that a widely participative election is required for confidence to
return. We, on the other hand, are of the opinion that another election is not likely
anytime soon and confidence can slowly come back if business community is
assured that the present government will stay for the whole tenure and the law and
order situation improves.



















No major surprises so far in 2014
Macroeconomic and Strategy Report
May 7, 2014
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
S
e
p
-
0
9
J
a
n
-
1
0
M
a
y
-
1
0
S
e
p
-
1
0
J
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1
1
M
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1
1
S
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p
-
1
1
J
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-
1
2
M
a
y
-
1
2
S
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p
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1
2
J
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n
-
1
3
M
a
y
-
1
3
S
e
p
-
1
3
J
a
n
-
1
4
Imports (3M Mov. Avg. USD mn) increasing gradually
Source: Bangladesh Bank
Import is a leading indicator of
economic activity as a large portion
of import consists of capital
machinery and raw materials.
Capital machinery saw some uptick
in the last 3 months but some
economists feel that it could be due
to some over invoicing.
2
Macro and Strategy Report





















The weak demand environment is reflected in the previous two charts. We are,
however, seeing some increase in imports but it cannot be concluded with certainty
that confidence is back without confirmation from other indicators like credit growth.
















Exports had acted quite resiliently so far, despite political unrest, garments
accidents and currency-depreciation of competing countries. This indicates the
sheer competitiveness of Bangladesh in this sector. However, in recent months
there has been a slight slowdown in growth even though it is nothing to be worried
about just yet.




Private sector credit growth (YoY) has not picked up post elections
Source: Bangladesh Bank
0%
5%
10%
15%
20%
25%
30%
J
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J
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1
4
Exports (3M Mov. Avg. YoY) resilient but there are early signs of slowing
Source: Bangladesh Bank
-10%
0%
10%
20%
30%
40%
50%
60%
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Pri vate sector credi t growth
averaged around 18-20% for the last
6-7 years
3
Macro and Strategy Report

Benign inflation continues



















Inflation remains to be within control at around 7.5% YoY at March (but higher than
the target of 7%). We had earlier felt that inflation could reach double digit by June
2014 driven by electricity price-hikes and base year effect. However, given the weak
demand environment, inflation in the last couple of months has been very weak and
it seems like low inflation might continue.

There are however a couple of factors that can cause prices to inch upwards
including higher rice and wheat support prices that will come into effect from May
and a gas price hike (timing is unknown at the moment).

FX Reserves continue to go up










Low non-food inflation keeps CPI in check
Source: Bangladesh Bureau of Statistics
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
M
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2
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J
a
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1
4
CPI Food Inflation Non-Food Inflation
Fx Reserves (LHS) and Import Cover (RHS) growing
Source: Bangladesh Bank
-
5,000
10,000
15,000
20,000
25,000
D
e
c
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0
9
M
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4
5
6
7
FX Reserves ($ mn) Months of Import
Food has around 60% weight in the
CPI basket. Repeated bumper
harvest of rice has played a critical
role in keeping inflation low.
Bangladesh will benefit from low oil
prices as it relies on imported oil
4
Macro and Strategy Report

With resilient exports and remittance and declining imports, FX reserves continued
to grow. Meanwhile central bank kept up its activity of buying dollars to prevent the
currency from appreciating. This was necessary to ensure Bangladesh maintains its
competitiveness vis--vis neighboring countries like India which saw its currency
getting weaker.

Governments revenue collection below target
Weakness in revenue collection by the government continued till March. This led
the government to revise down their total revenue collection to BDT 1,250 bn from
BDT 1,360 bn in the Fiscal Year 2013-14. It could be difficult to meet the revised
target as well. However, the government can always offset the lower revenue by
lower development expenditure like in the past.

Meanwhile, a large number of industries have asked for incentives like lower import
duty on raw materials and reductions in corporate tax in the upcoming budget. They
claim that the political unrest last year hurt their business. RMG sector has already
seen its tax at source go down to 0.3% of sales from 0.8% which will make the
government lose a substantial amount of revenue.

The National Board of Revenue (NBR) also mentioned that they are considering a
reduction in corporate tax rates which they feel are too high in the country. We
however feel that there is not much room for further fiscal incentives at the point.
Government needs to either broaden tax base or reduce subsidies to be able to
make room.
The road ahead
The key focus for the government should be revival of business confidence because
high FX reserves and low inflation would not mean much if private investment does
not pick up. Investment to GDP ratio in Bangladesh was low at around 22-24% of
GDP for quite some time, and the country needs this to go up to 30% to achieve
around 8% real GDP growth.


5
Macro and Strategy Report

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