The series of strikes and factory disasters in Bangladesh might damage investors’ confidence — factors that would weigh on the country’s credit profile, warned global credit rating agency Moody’s.
“Continued political tensions are credit negative because they may further damage investor confidence in Bangladesh against the background of recurrent industrial disasters in the ready-made garment sector,” it said in a report titled "Moody's Credit Outlook" released in Singapore Thursday.
It said foreign direct investment, which is already low at 0.9% of GDP in fiscal 2012 versus the Ba median of 2.3%, will likely decrease further in such an uncertain operating environment.
The rating agency that rated Bangladesh Ba3 stable for the last four consecutive years said clashes between police and Islamist supporters demanding an anti-blasphemy law culminated in violence, leaving more than 30 people dead.
The violence followed two days of protests led by a group called the Hefajat-e-Islam, which had set a May 5 deadline for the government to introduce an anti-blasphemy law.
“As we wrote in April, strikes and protests, which are common in Bangladesh, have occurred with greater frequency this year and are becoming increasingly violent,” it said.
In the lead-up to parliamentary elections, scheduled to be held between October 2013 and January 2014, strikes have become a more common tool for political parties to further their interests, it noted.
This year alone, reports indicate that 33 strikes, or hartals, have been held. Because of the strongly polarized nature of the political scene in Bangladesh, almost all strikes have been led by either the ruling Awami League, the main opposition (the Bangladesh Nationalist Party) or the Islamist party Jamaat-e-Islami, it said.
A building collapse known as Rana Plaza on 24 April killed around 740 people. Although the scale of this tragedy will likely prompt the government to reform labor laws and tighten safety standards, a number of Western retailers that source from Bangladesh’s garment factories have already threatened to stop orders, it said in its latest assessment.
It said, “Even before the collapse, the Walt Disney Company announced that it would end production of merchandise in Bangladesh. Since the collapse, Wal-Mart, Gap, Carrefour and others have called for more stringent labor standards. Continued strikes would only further deter such investors.”
Over the past year, Bangladesh has made significant progress on economic reform, with the government closely engaged with the International Monetary Fund under a $969m extended credit facility.
“The successful completion of the program entails adherence to fiscal targets and steps to improve financial stability. This process will likely be complicated without the support of all political parties,” it said.
Strikes and industrial incidents have yet to result in any visible effect on exports, which were up 10.2% for the nine months ended March 2013 versus the same period a year earlier.
“While the damage from the unrest could still be contained through a mix of policy measures and political consensus, prolonged tensions would weigh on the credit profile.”