The New York based global rating agency Fitch Ratings has said investors’ confidence might be dented due to renewed political tensions, bringing risks to the economic growth.
“Renewed political tensions and violence in Bangladesh in the first week of January may negatively affect foreign investor confidence, raising risks to growth over the long term,” says Fitch in a statement on Friday.
If violence persists and directly disrupts economic activity, especially by inflicting long-term harm to the key readymade garment (RMG) sector, this will be credit negative, it said.
Fitch had highlighted substantial political risk - linked to continued polarisation between the governing and opposition parties - as a key source of uncertainty for Bangladesh’s economic outlook when it assigned the country a ‘BB-’ long-term foreign currency issuer default rating in August 2014 when for the first time Fitch rated Bangladesh after the government allowed the central bank to sign an agreement with the rating agency in February last year.
Two other global rating agencies – Standard & Poor’s and Moody’s – are also providing the ratings for Bangladesh since 2010.
Fitch said the recent clashes follow a period of political violence leading up to the January 2014 election in which more than 300 people were reportedly killed.
The repeat of violence thus far in 2015 shows that tensions remain high, and may further damage foreign investor perception regarding the country’s stability, it said.
“Economic activity could directly be affected in the short term if violence and blockade continue. Protracted protests could also negatively affect domestic demand, consumer confidence, credit growth, and by extension, fiscal revenues, while also fuelling inflation.”
Still, it is important to note that the economy has proven relatively resilient to political protests and blockades in the past, it said.
GDP growth remained robust in FY2014 at 6.1%, even with the prolonged protests in the latter months of 2013, as factories moved work shifts to nights and weekends.
Ficth said the deeper structural risk to Bangladesh from the ongoing polarisation and repeated outbreaks of violence is the potential impact on long-term foreign investment decision-making.
Moving factories to other countries and changing big suppliers take time, it said. As such, it would be difficult to gauge in the short term the extent to which a continuation of violence would affect foreign investor confidence in Bangladesh as a production centre, it said.
RMG is a principal element in Bangladesh’s development strategy and make up 81% of exports, equivalent to 15% of GDP.
The concentration of exports in this sector means that a structural slowdown in the sector or any broader trend to transfer production assets to other countries would threaten Bangladesh’s long-term growth potential and risk a potentially dramatic deterioration of the external balances including the current account flipping from surplus to a large deficit, according to the rating agency.
