Bangladesh’s sovereign credit profile is supported by the robust growth of an economy bolstered by garment manufacturing industry exports, Moody’s Investors Service said in new a report.
However, weakening inflows of remittances from overseas-based workers could hurt consumption.
The country’s garment industry makes up roughly 70 percent of Bangladesh’s total merchandise exports, as measured in local currency terms, and accounts for significant foreign investment inflows. While the agricultural sector is still the biggest employer in Bangladesh, the garment industry employs more than 3 million workers and offers continued opportunity for labor productivity gains that will support future economic development and growth.
“Bangladesh will continue to invest in its garment manufacturing sector to capitalize on its strong comparative advantage of abundant low-cost labor,” said William Foster, a vice president and senior credit officer at Moody’s. “It will remain a leading global supplier of basic garments and the industry will continue to drive the nation’s growth, exports and job creation.”
Low cost advantage
The country’s focus on low-value garment exports helps to insulate it from the impact of higher trade tariffs that could result from greater protectionism globally.
While Bangladesh’s garment industry benefits from some of the lowest wage levels in the world, the country’s overall economic competitiveness lags that of its peers such as Vietnam, Cambodia and Sri Lanka, according to the report.
“When factoring in the quality of its physical infrastructure, skill levels and transparency of the business environment, the country’s low competitiveness hampers the ability of its economy to absorb shocks,” Moody’s said.
In addition to the garment sector, remittances from overseas workers contribute to Bangladesh’s economic growth by supporting household income and consumption. Remittances accounted for roughly 6.7% of the country’s gross domestic product in the 2016 fiscal year. However, inflows have dropped 14.6% in the first eight months of this fiscal year, driven by muted economic activity in Gulf Cooperation Countries. Moving forward, muted remittances growth could weigh on consumption.
“Bangladesh is less vulnerable to a rise in global trade protectionism and should gain market share as China moves up the value chain,” Moody’s said. “Bangladesh’s focus on low-value garment exports helps to insulate it from the impact of higher tariffs driven by global protectionism because demand for basic garments is relatively price inelastic. The U.S. withdrawal from the Trans-Pacific Partnership has diminished the risk that Vietnam gains significant market shares to Bangladesh’s disadvantage.”
Investment in infrastructure needed
The report noted that while low labor costs will remain while the government steps up efforts to boost weak non-price competitiveness, “that alone will not sustain future competitiveness.”
“Infrastructure constraints and low access to finance limit competitiveness and potential growth,” the report said. “The government’s current efforts to address these constraints may improve the overall business environment and raise investment, which would bolster Bangladesh’s competitiveness over the medium term.”
“We expect Bangladesh to continue to invest in and develop its [garment] sector to capitalize on its strong comparative advantage of abundant low-cost labor,” Moody’s said. “As a result, Bangladesh will persist as a top global supplier of basic garments.”
Most of Bangladesh’s exports go to the Euro Zone, which accounted for 38 percent of the total, followed by the U.S. with roughly 13 percent, and the majority of Bangladesh’s exports to these countries is apparel.
With rising labor costs and prices in China, if those costs ultimately get passed on to global buyers, it should incentivize a shift toward sourcing from lower-cost producers like Bangladesh, Vietnam, Cambodia and Sri Lanka.
According to the World Bank, a 10 percent increase in prices of Chinese apparel exports to the U.S. would likely lead to a more than 4 percent increase in employment in Bangladesh, which has one of the lowest labor costs in the world, at about 22 cents per hour. As a result, it is one of the most competitive production locations for low-cost, labor-intensive manufacturing like apparel.
“We do not expect price and exchange rate movements to weigh heavily on Bangladesh’s future competitiveness, due to expectations of ongoing productivity gains and the eventual transition of the exchange rate regime to a more flexible framework that references a wider basket of trade partner currencies,” Moody’s said.
As of January 2015, of the top 20 apparel exporting countries globally, Bangladesh maintained the second lowest minimum wage after Sri Lanka. Despite a large supply of labor, which tends to keep garment industry wages low, overall wages in Bangladesh have risen in line with inflation in recent years.
“If this trend persists, it could eventually lead to partial erosion of Bangladesh’s competitiveness compared with other low-cost producers that are generally experiencing lower inflation.” Moody’s said. “However, we expect that Bangladesh will be able to offset some of these pressures through productivity gains as investment in infrastructure and business capital advances along with economic development.”
The Rana Plaza effect
The Rana Plaza factory collapse in 2013 and a fire at Tazreen Fashions in 2012 resulted in a fall in foreign direct investment inflows to Bangladesh (though they have since recovered). The incidents damaged Bangladesh’s global reputation and have presented challenges to the government and industry there. In response, much of the industry that caters to international buyers agreed to implement new policy measures to improve factory conditions and safeguards for workers to comply with international standards.
In addition to strengthening labor standards, the government of Bangladesh is attempting to address competitiveness challenges by focusing on easing infrastructure gaps, increasing investment, including FDI, and improving the overall business climate, the report noted. Strong multilateral development bank and bilateral support will help bolster these efforts through financial and technical assistance for project development and implementation.
One such example of support came from the Asian Development Bank, which has increased its lending to Bangladesh to $8 billion for 2016-20 from $5 billion in 2011-15, and the newly created Asian Infrastructure Investment Bank has announced a $165 million loan for a power distribution system upgrade and expansion project.
Bangladesh has sufficient external buffers because strong export growth and remittances inflows have contributed to foreign-exchange reserves accumulation, resulting in an increase to about $31 billion in fiscal year 2017 from about $8 billion in 2011.
“However, a prolonged decline in remittance inflows would start to put negative pressure on both consumption and the external account, which could eventually constrain Bangladesh’s sovereign credit profile by detracting from GDP growth and reducing external stability,” Moody’s added.