Bangladesh: Ringing in the good times
3 min read
05 Apr 2017
3 min read
05 Apr 2017
Bangladesh is now in the league tables of the fastest growing major economies in the world with a GDP growth rate of over 7%. It is also emerging as a one of the leading frontier markets for global investors. Find out what is Bangladesh’s magic formula and how long will these good times last.
In 2005, investment bank, Goldman Sachs released a list called ‘Next 11’ or N-11, naming countries that along with BRICs (Brazil, Russia, India and China) economies would have a high potential of becoming amongst the world’s largest economies in the 21st century.
The N-11 included Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey, Vietnam and Bangladesh. At that time, Bangladesh along with Nigeria and Pakistan were the lowest performers on the Goldman Sachs Growth Environment Score (GES) and Bangladesh was expected to gradually move up to the average performers list by mid-period to 2050. The report projected that Bangladesh would have a GDP of USD 107 billion by 2015.
To the market’s surprise, by 2015, Bangladesh had already recorded a GDP of USD 195 billion. In 2016, the IMF stated that it was the 2nd fastest growing major economy in the world with a GDP growth rate of 7.1%. Today the country is a ‘must have’ in the portfolios of emerging market funds around the world. So how did Bangladesh hit this sweet spot?
Hitting The Sweet Spot
Wendy Werner, Country Manager for Bangladesh, Bhutan & Nepal, International Finance Corporation (IFC) explains, “Bangladesh’s focus and work on development indicators has paid off: there is a sustained increase in per capita income and poverty has halved since 1990.” IFC had a committed portfolio of over USD 1 billion in Bangladesh in more than 45 projects across sectors including power and textiles.”
Pro-growth policies, stronger internal security, lower taxes, lower inflation, higher investments in transport infrastructure & power and higher mobile and financial inclusion have led the country into a virtuous economic cycle of higher disposable income, higher per capita income, higher consumer spending and higher savings.
“We see similar growth dynamics today not just in Bangladesh, but also in Pakistan, Myanmar and Sri Lanka. But we are most impressed with Bangladesh of our four markets today,” says Jason Bajaj, Managing Partner, The Osiris Group.
Asian Private Equity firm, The Osiris Group, that has invested over USD 50mn in several companies in Bangladesh is now looking to scale up its investments in the country in renewable energy, telecommunications, transportation, water/waste management, and LNG/LPG energy, the consumer sector, insurance, recycling and manufacturing.
The backbone of Bangladesh’s spectacular rise has been its readymade garment’s (RMG) sector, which accounts for almost 80% of its exports and 20% of its GDP. Traditionally, it was just the RMG sector that attracted investors. But in the past few years, money has also been coming into other sectors, as well. That’s because the economy boasts of having low labour costs, a massive workforce and a huge internal market.
So much so that high-growth neighbouring economies like China and India are taking notice.
“Relative political stability and its strategic geographic position pushes its neighbours China and India to show continuing interest in its economy through FDIs and infrastructure support,” says business strategist and social entrepreneur, Aditya Shome (former MD of Marico Bangladesh).
According to reports, Bangladesh has received its largest ever pledge for assistance from China for a total amount of USD 38 billion. This comes as a part of China’s ambitious trade and infrastructure network to connect at least 60 Asian countries with Europe and Africa along the ancient silk route.
Similarly, last year India pledged USD 2 billion for socio economic development plans in what was touted to be its biggest line of credit extended to any country so far.
“Bangladesh has a large local consumer economy which is the target market for a number of enterprises today,” says Sanchayan Chakraborty, Partner, Aavishkaar Venture Management.
The power sector too is emerging as a clear focus area and has received the second largest investments after manufacturing.
According to the Bangladesh Power Development Board, the country has a total installed capacity of 15,379 MW but the maximum demand that it served in 2016 was 9,036 MW.
Yet, in the last few years, electricity generation has not kept pace with the country’s growing population. Generation is far below the installed capacity due to old and derated machinery and an overdependence on gas, which is short in supply.
Bangladesh’s electricity consumption has risen by 1.56 times the rate of GDP growth. The power sector is also saddled with rolling blackouts due to bottlenecks in transmission and distribution and heavy dependence on gas-fired power generation. Fossil fuel subsidies and electricity-sector losses are adding to the problems.
But Bangladesh is doing all it can to address this problem with more investments, new partnerships, agreements and joint ventures with companies across the world.
For instance, in January this year, Wärtsilä won the contract to supply Ace Alliance Power Limited a 150 MW Smart Power Generation plant. It also won a contract to supply a 310 MW Smart Power Generation plant to the United Group in Bangladesh.
IFC too has recently committed to invest USD 175 million in Summit Group's power generation project in Bangladesh. “Our support to Summit is in alignment with our objective to enhance the country’s electricity generation capacity, help address the massive energy gaps and to encourage other developers and investors to invest,” says Wendy Werner.
The Winning Stroke
As global investors and large economies woo Bangladesh, the next big challenge is to keep growing at the same pace with more political stability, lower regulatory hurdles and good governance. That, experts say, along with increased government spending via public private partnerships, diversification in exports, strengthening education and skill development, improving access to finance for small and medium enterprises and better management of debt financing will be key to its success in the future.
Currently it seems like Bangladesh is heading in the right direction. The country is expected to continue clocking a 7%-8% GDP growth in the coming years. Clearly, there’s reason for investors to believe that the good times have just about begun.
Steps towards to a brighter future
Bangladesh’s national electrification rate was only 18% in 1994. Things have changed for the better. More power plants are being built and more people are having access to electricity.