Fitch: Bangladesh tensions highlight substantial political risk

HONG KONG: 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 Ratings.

If violence were to persist and directly disrupt economic activity, especially by inflicting long-term harm to the key ready-made garment (RMG) sector, this would be credit negative.

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.

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.

Economic activity could directly be affected in the short term if the violence and blockades 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. 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.

The deeper structural risk to Bangladesh from the ongoing polarisation and repeated outbreaks of violence is the potential impact this could have on long-term foreign investment decision-making.

Moving factories to other countries and changing big suppliers take time. 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.

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.