MACRO-ECONOMIC REVIEW: BANGLADESH

Transcription

1 JULY 10, 2014 MACRO-ECONOMIC REVIEW: BANGLADESH Government targets the GDP growth of 7.3% in the FY , while GDP growth was 6.12% in the outgoing fiscal Exports showed resilience in tune with the growing Garments sector; marking 12.56% rise during July- May despite industrial disasters like the Rana Plaza building collapse Import growth started picking up, registered 18.08% in July-April Imports of capital machinery and food grain (rice & wheat) are on the rise Foreign exchange reserve crossed US$ 21 billion mark; high enough to settle import bills for more than six months Local currency against the US Dollar remained stable at BDT Remittances registered negative growth for the 1 st time in 13 years, recorded -3.55% during the 11 month of FY , due to a shrinking outflow of migrant workers and falling receipts from Middle Eastern nations Inflation ticks a bit higher, 7.48% in May from 7.46% in April Bank borrowing by the government in June stood at BDT billion against the revised target of BDT billion Private sector credit growth rises to 11.9% in April 2014 which was 10.7% in February 2014; whereas the target was 16.5% Call money rate remained stable for quite a long time at around 7% Foreign Direct Investment reached US$ 1.7 billion, which was US$ 1.2 billion last year Disclaimer: This document has been prepared by International Leasing Securities Limited (ILSL) for information only of its clients on the basis of the publicly available information in the market and own research. This document has been prepared for information purpose only and does not solicit any action based on the material contained herein and should not be construed as an offer or solicitation to buy or sell or subscribe to any security. Neither ILSL nor any of its directors, shareholders, member of the management or employee represents or warrants expressly or impliedly that the information or data of the sources used in the documents are genuine, accurate, complete, authentic and correct. However all reasonable care has been taken to ensure the accuracy of the contents of this document. ILSL will not take any responsibility for any decisions made by investors based on the information herein.

2 4.4% 5.3% 5.3% 6.3% % 6.6% 6.4% 6.2% 6.1% 6.2% % 6.7% 7.3% Bangladesh is in growth trajectory. Over a quite a long time, the country consistently achieved more than 6% GDP growth except few exceptional years. This high growth rate is mainly propelled by buoyant export, robust remittance inflow, growing industrialization & rising private sector etc. Gross Domestic Product (GDP) Considering FY as a base, BBS (Bangladesh Bureau of Statistics) estimates the GDP growth rate of the out-going fiscal as 6.12%, whereas the international donor agencies, World Bank (WB), Asian Development Bank (ADB) and International Monetary fund (IMF) estimates it to be 5.4%, 5.6% and 5.5%. For the up-coming fiscal, FY , Government targets the GDP growth as 7.3%, which was 7.2% in the previous year. The international lending agencies reported lower projection than the Government. The Washington-based lender, WB forecasts Bangladesh's Source: Bangladesh Bureau of Statistics (BBS) gross domestic product (GDP) will stand at 5.9% for fiscal year The ADB expects the growth to rebound to 6.2% in FY 2015, aided by higher remittance and export growth, as well as by prospects for continued economic recovery in the US and the euro zone. Contribution of Sectors to GDP: Production Based GDP Figure 01: GDP Growth Rate Last 5-yr CAGR of GDP: 6.2% The estimation of production based GDP comprises 15 sectors. All the 15 sectors are grouped into three broad sectors viz- agriculture, industry and service. The broad agriculture sector includes two sectors (i) agriculture and forestry and (ii) fishing. The broad industry sector comprises (i) mining and quarrying, (ii) manufacturing, (iii) electricity, gas and water supply and (iv) construction sector. The broad service sector consists of the collective outputs of the, (i) wholesale and retail trade, (ii) hotels and restaurants, (iii) transport, storage and communication, (iv) financial intermediations, (v) real estate renting and business activities, (vi) public administration and defense, (vii) education, (viii) health and social work and (ix) community, social and personal services. Figure 02: Broad Sectoral Growth Figure 03: Sectoral Contribution in GDP 12% 8% 6% 4% 2% Agriculture Industry Service 9.8% 6.6% 5.5% 8.4% 5.8% 3.4% Agriculture Industry Service % 49% 56% 55% 55% 54% 54% 17% 19% 21% 25% 26% 25% 27% 28% 29% 3 33% 31% 29% 26% 25% 19% 18% 17% 17% 16% Source: Bangladesh Bureau of Statistics (BBS); *Provisional Source: Bangladesh Bureau of Statistics (BBS); *Provisional The positive trend of the industrial sector continued to increase its portion over the other two sectors. The share of the industrial sector to the country s GDP registered an increment of 2. and contributed 29.61% of the total GDP (Figure 02). On the other hand, contributions of both the agriculture and service sectors to last fiscal years GDP declined by 2.68% and 0.31% than the previous fiscal and secured 16.33% and 54.05% of the total GDP respectively. According to the data, industrial growth in the last fiscal year shrunk to 8.39% from the previous rate of 9.64% while both agricultural sector and service sector swelled to 3.35% and 5.83% from the previous year s rate of 2.45% and 5.51% respectively (Figure 03). 1

3 GDP Per Capita Among other reasons behind the high rate of growth in GDP per capita, buoyant remittance inflow and bumper rice production contributed significantly in achieving the per capita GDP of US$ 1,115 (Table 01). As per the country s leading economists, for being the middleincome country by 2021, Bangladesh would require GDP growth of 7.5% to 8% per year based on accelerated export and remittance growth. Both public and private investment will need to increase as well. Export The export sectors are on the growth trajectory. The overall export earnings stood at US$27.37 billion, with a growth of 12.56%, during the July-May period of FY The Industry insiders expect that, the overall export earnings would stand at US$30.62 billion in the current fiscal in which export earnings from the apparel products would reach US$24.75 billion. In tune with the uptrend, the government set the country's total export target at US$34.20 billion with an average 10.74% growth for the upcoming FY Bangladesh exports about 168 different products and services to almost 186 countries. The main exportables are Readymade Garments, Knitwear, Home Textile, Frozen Food, Leather & Leather goods, Jute and Jute goods which contribute near about 87% of total export (Figure 05). On the other hand, the main export destinations of Bangladesh are USA, Canada, EU Countries including Germany, U.K, France, Italy etc. contributing almost 83% of total export (Table 02). USA is the single largest export destination of Bangladesh and Bangladesh is the sixth largest textiles and apparel sourcing country for the USA. The government is providing many incentives to stimulate the Export: The government increased the cash incentive for export of readymade garments to 5.25% from the existing 5%. Moreover, to encourage exporting new products and exploring new destinations (excluding United States, Canada and the countries of European Union), the cash incentive for the exporters has been increased to 3% from the existing 2%. Hence, an exporter will get maximum 11% cash incentive against exported products if he or she avails the cash incentive in existing three Table 01: Per Capita GDP & GNI (In US$) Per Capita GDP (US$) Per Capita GNI (US$) Population (In ICrore) * Figure 04: Export & Export Growth Export Earnings (US$ Export Growth % Table 02: Export Destinations Source: BBS; *Provisional ; *figure of Jul-May FY2014 Figure 05: Category wise Export, Jul-Apr Jute Goods 2.35% Others 14.48% Frozen Foods 2.17% Knitwear 39.76% Woven garments 41.24% Source: Bangladesh bank Country U.S.A. 19% 17% 16% Germany 13% 14% 13% U.K. 8% 9% 9% France 6% 6% 5% Spain 3% 4% 4% Canada 3% 3% 4% Italy 3% 4% 3% India 2% 2% 2% Netherlands 5% 3% 2% Belgium 2% 2% 2% Turkey 3% 2% 2% Other Countries 17% 19% 22% Export of EPZ 14% 15% 16% Total Source: Bangladesh bank 2

4 sectors which are traditional cash incentive, additional incentive and incentive for market expansion. [The benefit will be effective for the shipment of export items of the RMG sector between January 1, 2014 and June 30, 2015.] In the budget , the government has also halved the import duty on textile raw materials like flex fibre to 5% from the current, reduced the tax at source on cash incentive to 3% from the current 5%, reduced tax at source to 0.3 from existing 0.8. For all other exports, the tax deduction rate at source has been reduced from 0.8 to 0.6 to provide a more competitive edge to the export sector. Import of three types of fire safety equipment, i.e., fire resistant door, sprinkler system and equipment, and emergency light with exit sign and double heads, has been declared duty-free to ensure internal security and compliance of standards by the RMG sector. NBR also allowed the members of BGMEA and Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) for duty-free import of materials for pre-fabricated buildings, including hot-rolled iron or steel plate, flatrolled product of iron or non-alloy steel, I sections, H sections, self-tapping screw, bolts, and aluminum insulation only for once. These stimuli is expected to act as a catalyst to drive the country s exports to rise further and also it would help improve export competitiveness of the country s readymade garment products in the global market. Import Aggregate import payments of Bangladesh through July-April rose at US$ billion compared to US$ billion for the corresponding period of the previous year stating a 18.08% growth (Figure 06). Food grain imports have accelerated by 56% in the first 10 months of this fiscal year from that of the previous year with private importers taking advantage of declining prices in the global market. Import L/C opening of capital machinery increased by 31% though industrial raw materials remained flat (Table 03). During July-April , new opening of LCs soared higher by 11.65% and reached at US$ billion against US$ billion in the same period of the preceding year. In , major portion of total import payments of Bangladesh were made to China (21.7%), India (16.3%), Malaysia (5.1%), Korea (4.5%), Japan (4.1%), Singapore (3.7%), Indonesia (3.6%) Brazil (2.8%), Taiwan (2.5%) etc. Figure 06: Import & Import Growth Import (US$ bn) Import Growth Table 03: Fresh Import L/C Opening, Jul-Mar, L/C Opening (US$ bn) Growth over Jul-Mar Sectoral Distribution Consumer goods % 11.3% Intermediate goods % 8.2% Industrial raw materials % 37.5% Capital machinery % 9.3% Machinery for misc % 9.6% Petroleum & petro % 12.5% Others % 11.5% Total % 100. Remittance ; *figure of Jul-Apr Remittance emerged as a significant contributor in keeping the country in the high growth trajectory. During July-May , Bangladesh received nearly US$12.93 billion in remittance (Figure 07). According to a World Bank s latest issue of the Migration and Development Brief, Bangladesh received around US$14 billion last year becoming the third largest recipient of remittances in South Asia, after India and Pakistan. Figure 07: Remittance Inflow Remittance (in US$ bn) Remittance Growth ; *figure of Jul-Apr

5 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Bangladesh also ranked 8 th among the top 10 remittance recipient countries in the world, while neighboring India has secured the top position in it with US$70 billion in remittances. Of the remittance received, two-third comes through the private commercial banks, around 31% comes through stateowned commercial banks, and the rest comes through foreign commercial banks and specialized banks. Fifure 08: Countrywise Remittance, Saudi U.A.E. U.S.A. Kuwait Malaysia U.K. Oman Other Singapore Bahrain Qatar Italy South Korea Australia Libya 8.2% 6.9% 6.9% 4.2% 3.6% 3.4% 2.5% % 0.4% 0.4% 0.4% 12.8% 19.6% 26.5% Figure 09: No. of Persons left for abroad on Employment 1,200,000 1,000, , , , ,000 - ; * upto April Foreign Exchange Reserve The foreign currency reserves have crossed US$21bn mark for the first time in June 2014 (Figure 12). The purchase of US dollars by the central bank to stabilize the exchange rate from the market, stimulus to exporters including expansion of the export development fund and appreciation of the local currency against dollar are contributing to the phenomenal rise in the forex reserves. Figure 10: Foreign Exchange Reserve (US$ bn) As per the international standards, a country should have enough foreign exchange reserve to clear import bills for three months. Bangladesh will be able to meet import bills for more than six months by using the US$21 billion foreign exchange reserve. The international reserve is second largest among SAARC countries after India. The high level of reserve helps Bangladesh s sovereign rating needed to catalyze higher foreign direct investment. The remittance inflow and the reserve would increase further ahead of Eid-ul-Fitr when expatriate Bangladeshis usually send home more money. Foreign Exchange Rate Since May 2013, BDT/USD remained stable at level (Figure 11). The exchange rate had such a long stable run because the central bank kept buying the greenback to maintain the positive inflow of remittance and export earnings. BB purchased nearly $9 billion from banks between July 1, 2012 and May 7, 2014, and did not sell any dollar to banks during the period. 4

6 Figure 11: Yearwise BDT/US$ (Period Avg.) Figure 12: Monthwise BDT/US$ (Period Avg.) The dollar price had risen to Tk on January 29, From January 29, 2012 to May 30, 2013, the price of dollar against the taka continuously had declined (Figure 12). After the BB had bought a huge amount of dollar last fiscal year, the taka remained stable at around a dollar between May, 2013 and February BB purchased $3.63 billion from the local banks from July 1 to March 19 of this financial year in bid to tackle the dollar deprecation against the taka. Following the fresh dollar purchase this fiscal year, the country s foreign exchange reserve rose to a record $19-billion mark on February 19 for the first time. Inflation Inflation slightly increased to 7.48% in May, which was 7.46% in April (Figure 13). The government's inflation target for fiscal is 7%. The central bank recently raised the cash reserve requirement (CRR) by 50 basis points to 6.5 for the commercial banks. The move may reduce the inflationary pressure on the economy by way of withdrawing excess liquidity from the market. Figure 13: Point to Point Inflation 15% (Base: ) 5% General Food Non-Food % 5.2% In May, the food inflation accelerated to 9.09% from 8.95% in previous month while non-food inflation slightly fell to 5.16% from 5.23%. In rural area, inflation also marginally rose to 7.27% in May from 7.19% in April and in urban areas, it stood at 7.92% from 7.96%. The inflation target for fiscal is set at 6%. Private Sector Credit Growth Figure 14: Private Sector Credit Growth (in %) The country s credit growth rate in the private sector increased slightly in April from the previous month but it is still low in accordance with the central bank target of The year-on-year credit growth rate in the private sector stood at 11.86% in April compared with that of 10.46% in March (Figure 14). Under the monetary policy for July-December, the central bank had set 15.5% credit growth target for the private sector by December 2013 and 16.5 by June Jul-12 Sep-12 Nov Jan-13 Mar- 13 May Jul-13 Sep-13 Nov- 13 Jan-14 Mar

7 Macro-Economic Review: Bangladesh (July 10, 2014) The credit demand has declined drastically from the private sector that is still passing a stagnant situation mainly due to the persisting political uncertainty, the poor state of infrastructure and the non-availability of industrial gas connections and fragile banking sector etc. With the prevailing high interest rates hovering between 14-15%, private sector borrowers seem hesitant to take loan that resulted to the no sign of improvement in investment climate after polls. In addition to this, tightening the loan sanctioning procedure by most of the banks in the face of numerous banking scams last year could be another reason for the shrinking growth rate. Government s borrowing from the Banking system Bangladesh government has to greatly depend on borrowing from the country s banking sector to meet the budget deficit, which is 5% of GDP. Government s bank borrowing was up in last June as Figure 16: Government Borrowing from Banks (in BDT billion) the pace of development works to finish the annual development programme picks up in the closing month of the fiscal year. Till June 19, 2014, Govt. s bank borrowing stood at BDT billion against the revised target of BDT billion. However, since the banks have excess liquidity, this borrowing is unlikely to affect the money market much. On May 1, the banks' excess liquidity stood at BDT billion. In the FY P B , Government plans to borrow BDT ; P=Provisional (upto June 7); B=Budgeted billion from the banking sector to meet the budget deficit. Nonetheless, Bangladesh may face problem to get the sixth tranche of Extended Credit Facility (ECF) of International Monetary Fund, as govt. exceeded the limit of bank borrowing of BDT 240 billion until June 30, 2014 set by IMF for availing the loan. Interest Rate Spread of Banks The weighted average spread between lending and deposit rates offered by the commercial banks rose to 5.15% in March last from 5.06% in the previous month (Figure 17). The weighted average rate on lending stood at 13.36%, 11 while the average interest rate on deposits in the same 10 month was at 8.21%. The interest rate which is offered 9 by banks against fixed deposits has come down as the 8 banks are reluctant to mobilize more funds due to the lack of credit demand in the wake of the ongoing sluggish investment scenario. Though there is low demand for credit and also significant amount of excess liquidity in the banking system, interest spread has continued to remain high at 5.1% Figure 17: Interest Rate & Spread (in %) Spread Deposits Advances

8 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 Non-Performing Loan (NPL) Political unrest, frequent blockades and shutdowns, subdued business atmosphere, stagnant economic activities, a series of scams in the financial sector etc. has thrown the banking system in jeopardy. Besides, stagnancy in the share market, over dependency on the court for recovering loan kept the level of NPL more than (Figure 17). The BB on December 23 last year relaxed rescheduling Dec-09 Dec-10 Dec-11 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 policy for six months for all kinds of loans of the businesses who had suffered losses due to the political unrest. But this step could not stir up the condition of the banking sector. This special facility provided by the Bangladesh Bank is not likely to be extended further in the new fiscal year. This withdrawal probably will increase the NPL level again leaving a negative effect in the activities of trade and commerce. Liquidity Condition & Call Money Rate The overall excess liquidity with the commercial banks stood at Tk billion, as on May 1 last, mainly due to lower credit demand from the private sector. Central bank s recent move of raising the cash reserve requirement (CRR) by 50 basis points to 6.5 for the commercial banks will withdraw excess liquidity from the market. The latest policy intervention is expected to mop up over BDT 32 billion in excess liquidity from the market. Lower demand and excess supply of liquidity in the money market kept the call money rate stable for quite a long time (Figure 18). Foreign Direct Investment (FDI) Inflows of foreign direct investment in Bangladesh rose 44.8% in to $1.7 bn compared to previous year which was $1.2 bn in (Table 04). The World Investment Report of the UNCTAD shows Bangladesh is positioned as a second preferred investment destination in South Asia after India, which got $28 bn or 78% of the total FDI inflows into the region in In , the telecommunications sector received the highest $525 mn in FDI. Of the $1.7 bn FDI that Bangladesh received in , $761 mn came as equity capital (direct investment in Bangladesh), $324 mn as intra-company loans (debt transactions between parent enterprises and affiliates) and $645 mn were reinvested earnings (investors' share of profits not distributed as profits). 25% 2 15% 5% Figure 17: Classified Loan (% share to total outstanding) 9.2% 7.3% 6.1% 15.02% % 11.9% 12.8% Figure 18: Weighted Average Call Money Rate 8.9% 10.5% 7.35% Table 04: Sector wise FDI inflows (in mn US$) Sectors FY- FY- FY- FY Total Telecommunication ,202 Textiles & Weaving ,037 Trade & commerce Others Power, gas & petroleum Services Food Products Cement Chemicals & Pharmaceuticals Agriculture & fishing Leather & Leather Products Fertilizer Vehicle & Transport Equipment Metal & Machinery Products Construction Mining & quarrying Total ,195 1,729 4,613 Bangladesh aspires to be a middle income country within The country is relentlessly working towards its desired destination. The Government has taken a series of positive measures in recent years to address the challenge of infrastructural deficiency. 7