In sum, my few days in Dhaka confirmed AFC�s overall view. Bangladesh has great long term potential, if and when the politics are right. I have been traveling to Bangladesh frequently since 1997 and on each trip, I notice how the country has progressed since my last visit
Bangladesh�s prospects of economic growth
Thomas Hugger
With over 160 million people, a young and cheap labor force and a strategic location between India and China two of largest engines of global
economic growth over the past decade Bangladesh maintains strong prospects for extended economic growth.
The extent of Bangladeshs growth will largely depend on its leaders ability to improve economic and diplomatic ties among its neighbors. Completion of a highly anticipated Indo-Bangladeshi free-trade agreement will help spur Bangladeshs already surging garment, pharmaceutical, and software industries. Bangladesh has also begun to construct large infrastructure projects, such as electrical power plants, to address domestic and regional energy needs. In addition, with 50% of its workforce in the service sector, Bangladesh has the potential to become an offshore centre for outsourcing, which would help to further diversify its economy.
Bangladesh has two separate stock exchanges, the Dhaka Stock Exchange (DSE established on 28th of April 1954) and the Chittagong Stock Exchange (CSE established on 4th of November 1995). The DSE has a total of 274 listed companies with a market capitalization of USD 41.9 billion. The CSE hosts 246 companies and has a market capitalization of USD 33.7 billion as of February 2015.
Amidst all the talk of Asias high-potential emerging economies particularly the media frenzy surrounding Myanmar in the aftermath of the countrys reforms neighboring Bangladesh is perpetually ignored. But this bustling country of 156 million people, the 8th largest in the world, seems to only be featured in global news media when something bad has happened. Whether it was the 2013 Rama Plaza factory building collapse, the Nov 2014 death sentence handed down to the leader of Jamaat-e-Islami, the countrys main religious party, or the violent protests and street blockades in January 2015 led by the opposition political party, the Bangladesh Nationalist Party (BNP), many outside observers perceptions are largely shaped by the depressing stream of events trickling out of Bangladesh.
Despite the troubling headlines, Bangladesh does have some attractive investment characteristics. Its enormous population is famously hard-working, with established industries in textiles, manufacturing, pharmaceuticals, and chemicals, and also young the median age in the country is 24 years old. As wages and labor costs have risen in Chinas traditional manufacturing strongholds, factory owners have begun looking elsewhere to relocate their factories to cheaper destinations. Many factories have moved to Vietnam and Cambodia, but Bangladesh has also positioned itself as an attractive potential landing spot.
In the aftermath of several high-profile factory disasters and worker protests, the minimum wage for Bangladeshi garment workers was raised by 79% in November 2013 to USD 69/month, prompting concerns by factory owners that the countrys key export industry would become less competitive and lose business to other regional low-cost manufacturing destinations. However, a similar trend of wage increases in Asias garment producing hubs has unfolded in recent years, with violent crackdowns on striking textile workers in Cambodia leaving a black eye on the countrys biggest export industry and prompting a 60% increase from USD 80/month in 2013 to the new figure, USD 128/month, that was agreed upon in November 2014.
In Laos, ongoing labor talks may raise the countrys minimum wage to USD 99-111/month as early as March 2015, while wages in Vietnam have been raised to reach USD 101-146/month depending on the region, and Thailands minimum wage is roughly USD 202/month. In Myanmar, a minimum wage law was only introduced in March 2013, and the Ministry of Labor has still not formally announced what the official minimum wage will be, although the current minimum wage for public sector employees is about USD 50/month. Despite the large increase in percentage terms in Bangladeshs minimum wage in 2013, the country still remains very competitive and generally cheaper than its Southeast Asian rivals.
In an industry like ready-made-garments (RMG), however, profit margins are razor thin and many Bangladeshi factory owners worry about the costs and delays that will occur due to the increasing regulation and oversight of the countrys biggest export industry. Significant progress has been made to improve the monitoring of the safety of the countrys factories, including the establishment of the Accord on Fire and Building Safety in Bangladesh, a 5-year legal agreement between international labor organizations, NGOs, and retailers in the textile industry signed in May 2013 to maintain minimum safety standards in the textile industry, and the Alliance for Bangladesh Worker Safety, a group of 26 major global retailers representing the majority of North American imports of Bangladeshi RMGs formed in 2013 that has launched the Bangladesh Worker Safety Initiative to improve safety conditions in the countrys factories. Local factory owners complain, however, that the massive overhaul and costs of safety compliance will threaten their competitiveness and endanger the overall industry that employs millions of Bangladeshis.
Many high-volume factories in the country depend on sub-contracting to smaller firms to meet last minute orders, and the expensive and time-consuming process of inspections, structural upgrades, and fire / electrical equipment fixes is manageable for larger factories with wealthy owners but often too burdensome for smaller sub-contractors. Some in the industry have expressed concern that Bangladeshs competitive advantage of being an agile production base may be jeopardized if producers cannot comply fully to the new safety standards. According to the IFC, the costs of mandatory upgrades will cost owners between USD 100,000 to 1 million. However, several US apparel manufacturing firms say they have made investments to help improve factory safety and some have guaranteed loans for the IFC and Bangladeshs BRAC Bank to disburse to domestic factories.
Despite improvements in safety and oversight in the textile industry, the economy encountered a substantial obstacle in 2015 with ongoing transport blockades organized by the opposition political party, the Bangladesh Nationalist Party (BNP), to protest the detention of their leader, Khaleda Zia. The blockade was costing Bangladeshs transport sector alone USD 26 million per day due to delays and road blocks, and businesses were being pummeled by disruptions to vital components of their supply chain such as the import and distribution of raw materials and intermediate inputs. The transport blockade became increasingly become violent, with the death toll surpassing 300, more than 7,000 arrested, and widespread arson of commuter buses and cars. From the 5th to 23rd of January, an organization of businesses estimated that the economic loss caused by the protests and transport blockade was equivalent to 2.7% of the countrys GDP, contributing to delays in goods shipment and rising prices for products across the country.
Bangladeshs capital markets have slumped in response to the turmoil, with both the Dhaka and Chittagong stock exchanges falling significantly in the month of January. Sadly, such chaos and calamity has become relatively common in Bangladesh, but the general investment thesis of a growing consumer class in the worlds 8th largest country and an emerging low-cost manufacturing hub remains intact despite the many bumps in the road that we expect for the country.
On a brighter note, from a macroeconomic standpoint, one global trend that should have a positive impact on Bangladesh is the fall in oil prices in recent months. Through the end of January 2015, oil had posted seven consecutive months of losses for the first time in history, with Brent falling 50% and sinking to a six-year low. Bangladesh is a net importer of oil, importing 5 million tonnes of fuel oil and 1.3 million tonnes of crude oil annually. For Bangladesh, lower oil prices should boost the country by stimulating domestic spending, raising purchasing power, contributing to sizeable foreign exchange savings, and reducing the cost of living through lower transport, fuel, and electricity costs. The economic stimulus effect will ultimately depend on the cost saving that is passed on to the consumer via lower petroleum prices in the domestic market, as the sole oil importer is the state-owned Bangladesh Petroleum Corporation (BPC).
In line with our process of being on the ground in the countries we invest in, I was in Bangladesh in January 2015. In summary, my few days in Dhaka confirmed AFCs overall view. Bangladesh has great long term potential, if and when the politics are right. I have been traveling to Bangladesh frequently since 1997 and on each trip, I notice how the country has progressed since my last visit: expanding and improving infrastructure, for example, and gradual wealth generation which is lifting people from absolute poverty to low income earners. This wealth generation has, unfortunately, still eluded many Bangladeshis, primarily due to political instability and general bureaucracy. When I look at other countries in the AFC universe like Cambodia or Myanmar, I see them overtaking Bangladesh soon. However, with the ongoing shift in low cost manufacturing, particularly in textiles and ready-made-garments (RMG), to cheaper destinations, Bangladesh is well-positioned to be a major beneficiary thanks to its existing RMG industry and infrastructure which will result in general economic growth benefitting many of the hard-working people of Bangladesh.
Asia Frontier Capital Newsletter Country Snapshot: Bangladesh
