Boston, MA -- (SBWIRE) -- 06/11/2013 -- Core Views

The government's record on corruption has once again been hit and brought into the domestic and international spotlight following a highly critical report by Transparency International Bangladesh.

Public unrest owing to heightened tensions between the ruling Bangladesh Awami League (AL) and its main opposition, the Bangladesh Nationalist Party (BNP), are unlikely to subside as both sides continue to confront each other regarding the restoration of the caretaker government system. In addition, unrest stemming from the ongoing war crimes trials is unlikely to dissipate in the near term as the tribunals are still in the early stages of handing out their verdicts.

On a related note, the handing out of the tribunal's first verdict in January should boost the government's political standing as it inches closer towards fulfilling an electoral pledge. Having said that, the ongoing trials could be a catalyst for Islamist militancy in the country.

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Contrary to our earlier expectations that Bangladeshi economic growth would stabilise this fiscal year (FY2012/13 [July-June]), real GDP growth is expected to fall to 6.1% as economic data so farin 2013 has been unexpectedly soft, marking the second consecutive year of slower economic expansion.

Looking ahead into FY2013/14, we believe an upturn in economic activity should take place in Bangladesh, given easing credit conditions and the improving external demand outlook. We are forecasting full-year real GDP growth of 6.5% for the upcoming fiscal year.

After two-and-a-half years of holding a hawkish stance towards monetary policy, Bangladesh Bank (BB) has finally decided to reverse its posture, cutting its policy rates by 50 basis points (bps) in January. Considering the central bank's ambitious targets for credit growth, we expect an additional 50bps worth of further easing in the months ahead.

Bangladesh Bank (BB) has allowed the taka to strengthen in line with the strong and supportive fundamental pressures on the currency - rising export growth, still-contracting imports, and robust remittance inflows. With the underlying fundamental picture is unlikely to change considerably in the short term, we will see a broad continuation of the recent taka strength. Further taka strength should help the economy's floundering import sector.

The outlook for the Padma Bridge has once again become unclear, with the government withdrawing its request for a US$1.2bn loan for the project from the World Bank. We highly doubt the government would be able to raise the necessary funds for the project domestically.

Major Forecast Changes

We have downgraded our FY2012/13 real GDP growth forecast to 6.1%, and upgraded our FY2013/14 projection to 6.5%. Both were at 6.3% previously.

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