IN BRIEF

  • Bangladesh records the highest Trade Confidence Score in our survey of twenty five countries with respondents particularly positive about the outlook for trade volumes, trade with Europe and buoyed by lower costs for logistics and materials and higher profit margins.
  • The favourable current backdrop of strong domestic growth and supportive macroeconomic policy has given Bangladesh a good opportunity to implement some much needed reforms. This impetus towards reform should improve Bangladesh’s attractiveness to FDI investors.
  • We expect exports to average growth of 10.6% from 2017-20, helped by infrastructure development, currency competitiveness in Europe, and trade liberalisation. Clothing and apparel accounts for around three quarters of Bangladesh’s exports but seven out of the eight different goods sectors are forecast to grow at a double digit pace from 2016-20.

We expect Bangladeshi GDP to grow by more than 6.5% in 2015 and 2016, helped by accommodative monetary policy and expansionary fiscal policy. Public investment into transport and energy infrastructure has risen notably in recent years and this should help attract more FDI, encouraging more export diversification. But Bangladesh will also maintain the strong foothold it has the global market for textiles and garments.

SHORT-TERM SNAPSHOT

HSBC Trade Confidence Score - The trade confidence score rose to 131, a full twenty three points higher than 2015H1, despite the weaker global outlook (over the same period, we have reduced our forecast for world GDP growth from 2.6% to 1.9% for 2015 and for 2016 from 2.1% to 2.9%). Moreover, Bangladesh is now the highest scoring country in our sample of twenty five. Indeed more than two thirds of respondents expect trade volumes to increase over the next six months, up from less than half six months ago.

More than half of respondents see Asia as the most promising region to do business with over the next six months, little changed from the previous survey. And despite the gradual downgrading of growth expectations for China in recent years, 30% still see it offering the best opportunities for growth of international business, up from 22% six months ago. The European Union is Bangladesh’s biggest export partner and 37% of respondents see Europe as the most promising region for business, nearly twice as many as six months ago.

Nearly 40% of respondents cited unfavourable changes to government regulation as a possible barrier to growing their international business over the next six months. A third also raised concerns about higher interest rates, likely reflecting both global uncertainties over the timing of upcoming tightening in the US and also domestic concerns over possible food price pressures. More positively though, almost a third of respondents expect higher profit margins, up from a quarter six months ago while more respondents also think exchange rate movements will be favourable for international business, and expect lower costs for logistics, and raw materials. Almost 100% use the US$ to settle trade deals (90% as primary settlement currency), up from 90% six months ago.

LONG-TERM OUTLOOK

Economic Outlook – GDP grew by a stronger than expected 7% on the year in 2014/15 (to end-June 2015) and we forecast full year growth of close to 7% for 2015 and 2016. Expansionary fiscal policy (and the particular focus on transport and energy infrastructure), improving business sentiment, reasonable growth in overseas remittances and continued trade liberalisation should help activity maintain solid momentum in coming years.

The favourable backdrop of strong growth and expansionary policy has given Bangladesh a good opportunity to implement some much needed reforms and the budget for the fiscal year 2015-16 proposes some key infrastructure measures, including a drive to revitalise public-private partnership initiatives. There are a number of large projects already under way, including the construction of a four-lane Dhaka-Chittagong and Dhaka-Mymensingh highways, the Padma bridge and the Dhaka metro rail network, coal-fired and nuclear power plants and an LNG terminal. The government has also unveiled a plan to raise power generation substantially by 2021.

Bangladesh has the fourth largest population in East Asia and its low wage level relative to China has supported the rapid growth of the textiles and garments sector. Investor confidence in the sector will also be supported by the Accord on Fire and Building Safety, a five-year agreement between textile retailers to set minimum standards in Bangladesh’s textiles sector. More than 170 retailers have signed up to this, but to sustain strong growth the sector must also aim to raise productivity and move into higher-value lines. Rising incomes and improved infrastructure should gradually open up the market for consumer goods and encourage a move towards higher value sectors.

Export Corridors to watch – Clothing and apparel is Bangladesh’s biggest export sector, and we expect it to contribute three quarters of the increase in exports from 2021-30. The textiles and wood manufactures sector will contribute another 15%. But Bangladesh’s economy is gradually upgrading. Industrial machinery exports are expected to grow by 12% from 2021-30 (faster than the overall average of 9%, albeit from a relatively low base). According to the World Bank, the literacy rate for 15-24 year olds in Bangladesh rose to 81% in 2013 from 64% in 2001 and over the same period the number of mobile phone subscribers per 100 people rose from less than 1 to nearly 75. Upgrading the skills of the workforce and also the use of technology should help Bangladesh gradually move into higher value sectors. Indeed we expect ICT equipment exports to grow by 13% from 2021-30 and exports of road vehicles and transport equipment to grow by 14% over the same period.

Sector contribution to increase in exports

The US, Germany and the UK are Bangladesh’s three largest individual export partners (amongst the 24 trade partners in the HSBC Trade Forecast) and this will still be the case in 2030. Indeed, despite the strong appreciation of the Taka against the Euro through 2014, exports of clothing and apparel to both Germany and France still grew by a robust 13% in that year. And as a WTO member, Bangladesh benefits from the European Union's "Everything but Arms" agreement, which grants duty free, quota free status to all exports, except arms and ammunition.

Top 5 Hotlist Export Destinations

Rank

2014

2030

1

USA

USA

2

Germany

Germany

3

UK

UK

4

France

France

5

Canada

Canada

*Ranking among the 24 trade partners covered in the HSBC Trade Forecast

Exports to the US slowed last year, reflecting the suspension of Bangladesh’s duty free access to the US market under the generalised system of preferences (GSP) since June 2013 on safety concerns after the clothing factory disasters. A US review of this in August 2015 acknowledged that progress has been made but concluded that further progress is needed before the preferences are restored. We see Bangladesh continuing to improve its safety laws. Meanwhile other markets are also of interest. The fastest growing markets from 2021-30 are forecast to be the large consumer markets of China, India, Korea, Turkey, Saudi Arabia and the UAE.

Import Corridors to watch – According to the 2015/16 World Economic Forum Global Competitiveness report, Bangladesh is ranked just 123rd out of 140 countries for its infrastructure. But as we highlighted earlier, the government is taking advantage of the low fuel price, strong GDP growth environment to implement a number of infrastructure reforms. As a result of these infrastructure needs, we expect industrial machinery to contribute nearly 20% of the increase in imports from 2021-30 and for transport equipment to account for nearly 10%. But reflecting the dominance of the textiles and garments sector in Bangladesh, textiles and wood manufactures will remain the biggest import sector out to 2030, contributing almost a quarter of the increase in imports from 2021-30.

Sector contribution to increase in imports

China and India were Bangladesh’s two largest import partners in 2014 (amongst the 24 trade partners in the HSBC Trade Forecast) and will still be the top two in 2030, reflecting the solid growth of these regional giants. Trade liberalisation between these countries in recent years is also set to continue. India and Bangladesh already have a free trade agreement in place while China allows Bangladesh some preferential trade access and has suggested opening up negotiations on a possible free trade agreement between the two countries.

Top 5 Hotlist Import Origins

Rank

2014

2030

1

China

China

2

India

India

3

Singapore

Singapore

4

Indonesia

Malaysia

5

Hong Kong

Korea

*Ranking among the 24 trade partners covered in the HSBC Trade Forecast

Other countries which are expected see their exports to Bangladesh grow at a double digit pace include Malaysia, Indonesia, Canada and Brazil. These countries are all commodity producers and we expect that Bangladesh’s fuel needs will rise substantially as the industrial sector expands and develops.

DRIVERS OF RECOVERY

Although real GDP grew by about 7% in the fiscal year to June 2015, US$ exports underperformed headline GDP, gaining just above 3% over the same period. We expect exports to pick up in 2016 though, helped by stronger world trade, in particular stronger demand for textiles and garments from the West. Moreover, although textiles and garments accounts for more than 80% of its exports, the future is not just in clothing for Bangladesh. Seven out of the eight different goods sectors are set to grow at a double digit pace from 2016-20; the only one growing slower is likely to be agriculture, which largely reflects the economy upgrading.

The EU is Bangladesh’s largest export partner, with textiles and garments the main product it buys. Since late 2013, consumer spending has grown steadily in the Eurozone, gaining close to 2% in H1 2015 and real wage growth and rising employment. Bangladesh should also become more price competitive in Europe as having appreciated by more than 20% against the Euro from end-2013 to the end of August 2015, the Taka is expected to depreciate modestly through 2016.

Public investment picked up in 2014/15 and we expect it to remain robust in the next five years. Indeed the 2015/16 budget offered great promise, including some key infrastructure reforms, a drive to revitalise public-private partnership initiatives and a roadmap to increase power generation. There are a number of large projects under way, particularly in transport and energy infrastructure. The completion of these projects will make it easier to transport exports and a steady improvement in energy generation will benefit export orientated manufacturing and help attract FDI.

The impetus towards reform is promising. Inward FDI was less than 1% of GDP in 2014, compared to 2% in India but the potential to attract more FDI inflows is large and the progress made in recent years towards greater macroeconomic stability and better infrastructure is encouraging. And if the suspension on Bangladesh’s duty free access to the US market under the GSP was to be lifted, this would boost trade with the US.

Exports by sector

About the HSBC Trade Forecast – Modelled by Oxford Economics

Oxford Economics has tailored a unique service for HSBC which forecasts bilateral trade in goods, based on HSBC’s own analysis and forecasts of the world economy. A top-down approach is employed, with Oxford Economics’ suite of models used to ensure consistency between HSBC’s forecasts for economic growth and exchange rates in key countries and the more granular projections for bilateral trade flows presented here.

Oxford Economics employs a global modelling framework, with headline bilateral trade forecasts constructed as a function of final demand in the destination market and the exporter’s competitiveness (as measured by relative unit labour costs). Exports, imports and trade balances are identified, with both historical estimates and forecasts for the periods 2015-20 and 2021-30.

These headline bilateral trade forecasts are also disaggregated by sector, using Oxford Economics’ Industry forecasts to inform future production trends. Sectors are classified according to the UN’s Standard International Trade Classifications (SITC) system at the two-digit level and grouped into 30 sector headings.

Oxford Economics produces a global report for HSBC, as well as country specific reports on the following 21 countries: Hong Kong, China, Australia, Indonesia, Malaysia, India, Singapore, Vietnam, Bangladesh, Canada, USA, Mexico, Argentina, UK, France, Germany, Poland, Ireland, UAE, Saudi Arabia, and Egypt. The analysis also includes trade with Japan and Korea for a total sample of 25 key trading nations.

All trade flows data are reported in nominal US-dollar value terms (using market exchange rates) unless otherwise specified. This means that fluctuations in a country’s terms-of-trade due to relative price and exchange rate effects are reflected in the data.

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