Higher credit rating but uncertain policy support for investment

Higher Credit Rating but uncertain policy support for investment M. S. Siddiqui Legal Economist e-mail: shah@banglachemcial.com Country Risk defined as the probability that changes in the business environment in another country where you are doing business may adversely impact your operations or payment for imports resulting in a financial loss.

Country risk is a combine of risks associated with investing in a foreign country. These risks include political risk, exchange rate risk, economic risk, sovereign risk and transfer risk, which is the risk of capital being locked up or frozen by government action. Country risk varies from one country to the next. Some countries have high enough risk to discourage much foreign investment.

Country risk also includes sovereign risk, which is a subset of risk specifically related to the government or one of its agencies refusing to comply with the terms of a loan agreement.

Country risk also include political, macroeconomic mismanagement, war or labor unrest resulting in work stoppages. Political changes may come about due to a change in leadership, control by a ruling party, or war. It includes new economic policies may be instituted resulting in expropriation of assets, nationalization of private companies, currency controls, inability to expatriate profits, higher taxes or tariffs, and a host of minor impacts.

On a macroeconomic level, countries may pursue unsound monetary policy resulting in inflation, recession, higher interest rates, and shortages in hard currency reserves.

Multinational Companies (MNCs) are interested in the economic policies of these countries, because economic policies determine the business environment. However, country risk assessment cannot be only economic in nature. It is also important to consider the political factors that lead to economic policies.

Political risk can be assessed from a country-specific (macro or country risk analysis) and a firm-specific (micro or firm risk analysis) perspective. A useful indicator of the degree of political risk is the seriousness of capital flight. Capital flight refers to the export of savings by a nation’s citizens because of fears about the safety of their capital.

Donors have identified Bangladesh’s strength and weaknesses involving some factors. The strengths are (1) Competitive garment manufacturing sector due to low labour cost, (2) Substantial remittances from emigrant workers, mainly working in the Gulf, (3) International aid enabling funding needs to be covered, (4) Moderate domestic debt, (5) Favourable demographics: 45% of Bangladeshis are aged under 15. The weakness are (1) Economy sensitive to development of global competition in the textile sector, (2) Very low per capita income, (3) Recurrent political and social tensions, (4) Business environment shortcomings, (5) Lack of infrastructure, (6) Recurrent natural disasters (cyclones, serious floods) which result in major damages and the loss of crops.

The services sector of Bangladesh share keeps increasing and now for half of GDP and half of the population still work in agriculture. Bangladesh has few products for export and Garment is about 80% of the total export over-reliant on a single garment sector for its exports. Provider of millions of jobs, About 60% going to the EU market where Bangladesh benefits from a preferential access and demand for garments is moderately elastic. Even though, the low-cost advantage is expected to

remain subject to fierce regional competition from South- East Asian countries (Cambodia, Vietnam, Indonesia and potentially Myanmar). It also was hit by tragic Rana Plaza factory collapses, thereby putting it under the spotlight. This is a major concern of overseas buyers.

The domestic demand, accounting for 75% of GDP has been hit by slowing credit growth, workers’ remittances and stagnating investment. Remittances from Bangladeshis working abroad are a powerful buffer against external shocks as they account for one third of total current account receipts and tend to be very resilient. They offset the country’s huge trade deficit and allow the current account to fluctuate chronically around balance.

Our economy is vulnerable to climate change, with frequent natural disasters, and poverty remains huge despite significant progress in human development and a decade of resilient and strong growth.

Weak public finances, especially regionally low fiscal revenues, hamper anti-poverty policy and public investments in infrastructure that are badly needed, thus hindering economic development. Looking forward and despite several vulnerabilities, Bangladesh has the potential to raise its growth trajectory, notably thanks to a fast-rising middle class, provided the business environment and political stability are improved, which is a big challenge for the country.

Bangladesh presents a more favourable short-term political risk profile thanks to much improved external liquidity fuelled by record-high foreign exchange reserves. These have been sharply built up mainly as a result of robust garment exports in an adverse climate and strong workers’ remittances from the Gulf. Until a satisfying outcome is found, the short-term outlook is, however, clouded by risks related to the political crisis.

Medium- to long-term political risk remains high in Bangladesh although the country manages to preserve macroeconomic stability. One major explanatory factor lies in the long history of political instability and violence that peaked last year. The general election boycott by the opposition last January has maintained political uncertainty with the risk of renewed social unrest and business disruption. The spread of Islamism and terrorism together with ethnic tensions are also risks to take into consideration.

The domestic investment is another indicator of country risk. An economist suggested four different investment regimes in Bangladesh. The first regime (1979-80 to 1989-90) is characterised by low level of investment-GDP ratio with an annual average of 16.5 percent.

This regime generated large fluctuations in GDP growth rates and the annual average GDP growth rate was only 3.5 percent. The second regime (1990-91 to 2004-05) saw a steady rise in investment-GDP ratio with an annual average of 21 percent. This regime yielded an annual average GDP growth rate of 5 percent. The third regime (2005-06 to 2008-09) experienced a higher but virtually flat investment-GDP ratio of 26.2 percent and a resultant rise in annual average GDP growth rate to 6.2 percent. Finally, the fourth regime is the current one (200910 to 2013-14) with a rise in annual average investment-GDP ratio to 28.2 percent, with 6.3 percent annual average GDP growth rate.

The capital plight from Bangladesh to other countries is another indication of unsafe lands for illegal and even for legal money also negative indicators for overseas investors.

Good governance is one of the major concerns of overseas investors. The World Bank has indentified 6 dimensions of governance: (1) Voice and Accountability (VA) – capturing perceptions of the extent to which a country's citizens are able to participate in selecting their

government, as well as freedom of expression, freedom of association, and a free media. (2) Political Stability and Absence of Violence/Terrorism (PV) – capturing perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically- motivated violence and terrorism. (3) Government Effectiveness (GE) – capturing perceptions of the quality of public services, the quality of the civil service and the degree of its independence from political pressures, the quality of policy formulation and implementation, and the credibility of the government's commitment to such policies. (4) Regulatory Quality (RQ) – capturing perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development. (5) Rule of Law (RL) – capturing perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence. (6) Control of Corruption (CC) – capturing perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as "capture" of the state by elites and private interests. These 6 indicators are poor in the regional and global context.

Despite all these odds, OECD has upgraded Bangladesh country risk classification to 5 from 6 on 26 th June 2015. Bangladesh's per capita income was $1,080 in 2014 in line with the World Bank's gross national income (GNI) -- higher than the Washington-based lender's set threshold of $1,045.

Bangladesh yesterday graduated from the low income status to lower middle income nation (LMIC), meeting the World Bank's requirements comfortably. A country is categorised as a low income one if its GNI is less than $1,045, lower middle income country if the GNI is $1,046-$4,125, higher middle income when the GNI is $4,126-$12,735 and higher income country if the GNI is more than $12,735.

There are positive good news for Bangladesh.

A recent decision of the government has barred companies with full foreign ownership from obtaining fresh licence for freight forwarding (FF) business in a bid to facilitate the local companies. Only joint venture and local companies will be able to obtain new licence for freight forwarding business from the current fiscal year (FY), 2015-16, customs rules said. The new move for restricting the fully-owned foreign companies in the business as 'suicidal', considering the government's efforts to attract FDI. Overseas investors usually invest in a country following successful operations of small trading companies. The amendments will give a wrong message to the foreign investors.