Boston, MA -- (SBWIRE) -- 02/05/2013 -- Core Views

The government's record on corruption has 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 FY2012/13 (July-June), as we expect domestic macroeconomic conditions to be more supportive, we believe that the broader economy will stabilise. We project the Bangladeshi economy to grow by 6.3% this fiscal year.

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That said, we remain concerned about the likelihood of the still-bleak external environment offsetting some of the domestic gains. Indeed, in the near term, the critical readymade garment (RMG) sector's prospects remain subdued given its pronounced reliance on the sluggish economies of the EU and the US.

We continue to see Bangladesh Bank (BB) reversing its long-held hawkish stance on monetary policy this fiscal year, with the ongoing spate of disinflation continuing to bode well for our call of 25 basis points (bps) worth of rate cuts.

While the amount of remittance inflows into Bangladesh has been encouraging, we believe that there is an acute risk of a crisis in inflows as Dhaka continues to dither on its ongoing labour dispute with the UAE.

A few months into its extended credit facility (ECF) with the International Monetary Fund (IMF), it appears that relations between the Bangladeshi government and the international lender are already starting to sour, as the former dithers on key tax and banking sector reforms. In our view, the government's posture towards the IMF's agenda will continue to be one of hesitation.

Major Forecast Changes

The government decided to revise the base year for calculation consumer price inflation (CPI) to 2005-2006 and change the weights of the basket, resulting in a large one-off fall in the headline inflation rate. Regardless of this drop, our view for continued disinflation and for the central bank to soon reverse its two-year long hawkish stance on monetary policy remains unchanged. For our purposes, we are sticking to the 1995-1996 CPI index until we obtain more readings of inflation based on the later weights.

Key Risk To Outlook

Downside Risks To Growth: We highlight that the government's ongoing reliance on debt will continue to be a cause for concern, given the associated inflationary and crowding out risks. However, we note that public sector debt growth has slowed considerably.

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