Investment: Despite better country ratings hurdles remain

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Offline Badshah Mamun

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Investment: Despite better country ratings hurdles remain
« on: July 14, 2015, 01:39:45 PM »
Investment: Despite better country ratings hurdles remain

Country risks, defined as the probability that changes in the business environment in another country where one is doing business, may adversely impact one's operation or payment for imports resulting in a financial loss. The country risk is a combine of risks associated with an investment in a foreign country. These risks include political risk, exchange rate risk, economic risk, sovereign risk and the transfer risk, which can see the capital locked up or frozen by any government action. Country risks vary from one country to another. Some countries have the high risks to discourage much foreign investment.

The sovereign risk is a subset of risks specifically related to the government or one of its agencies refusing to comply with the terms of a loan agreement. Country risks also include political, macroeconomic mismanagement, war or labour unrest resulting in work stoppage. Political changeovers may take place due to a change in leadership, control by a ruling party or any war. In such cases new economic policies may be instituted resulting in expropriation of assets, nationalisation of private companies, currency control, inability to repatriate profits, higher taxes or tariffs and a host of minor impacts.

At the macroeconomic level countries may pursue unsound monetary policies 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, when it comes to the political factors that lead to the economic policies. 

Political risks can be assessed from the country-specific (macro or country risk analysis) and firm-specific (micro or firm risk analysis) perspectives. A useful indicator of the degree of political risks is the intensity of capital flight. Capital flight is the export of savings by a nation's citizens who are fearful about the safety of their capital.

STRENGTHS AND WEAKNESSES: Donors have identified Bangladesh's strengths and weaknesses in view of these. The strengths are: (1) A competitive garment manufacturing sector due to low labour costs, (2) Substantial remittances from emigrant workers, mainly working in the Gulf, (3) International aid meeting the funding needs, (4) Moderate domestic debt, (5) Favourable demographics: 45 per cent of Bangladeshis are aged under 15. The weaknesses are: (1) Economy is sensitive to the 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, floods), which result in major damages including the loss of crops.

The services sector share of Bangladesh keeps increasing and now it accounts for a half of GDP (gross domestic product) and a half of the population still work in the agriculture sector. Bangladesh has few products for export and garment accounts for about 80 per cent of the export basket. It indicates the over-reliance on a single sector for exports. The sector creates jobs for millions. About 60 per cent of the export goes to the EU market, where Bangladesh benefits from the preferential access and the demand for garments is moderately elastic.

The domestic demand, accounting for 75 per cent 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 the total current account receipts and tend to be very resilient. They offset the country's wide trade deficit and allow the current account to fluctuate chronically around the balance.

Our economy is vulnerable to the climate change that causes frequent natural disasters. Poverty also remains a concern despite significant progress in human development and a decade of resilient and strong growth. Weak public finances, especially low fiscal revenues regionally, 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 notably thanks to a fast-rising middle class, provided the business environment and political stability improves, which is a big challenge for the country.

Bangladesh presents a more favourable and short-term political risks due 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 good flow of 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-long term political risk remains high in Bangladesh, although the country manages to maintain macroeconomic stability. One major explanatory factor lies in the long history of political instability and violence that heightened last year. The general election boycott by the opposition on January 5, 2014 has led to political uncertainty that risks renewed social unrest and business disruption. The spread of Islamism and terrorism coupled with ethnic tensions are the other risks that should be taken 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 a low level of investment-GDP ratio with an annual average of 16.5 per cent. This regime generated large fluctuations in GDP growth rates and the annual average GDP growth rate was only 3.5 per cent. The second regime (1990-91 to 2004-05) saw a steady rise in the investment-GDP ratio with an annual average of 21 per cent. This regime yielded an annual average GDP growth rate of 5.0 per cent. The third regime (2005-06 to 2008-09) experienced a higher but virtually flat investment-GDP ratio of 26.2 per cent and a resultant rise in the annual average GDP growth rate to 6.2 per cent. Finally, the fourth regime is the current one (2009-10 to 2013-14) with a rise in the annual average investment-GDP ratio to 28.2 per cent, with a annual average GDP growth rate of 6.3 per cent.

Capital flight from Bangladesh to other countries is another indication of how unsafe the land is for illegal and even legal money. It is also a negative indicator for overseas investors.

GOOD GOVERNANCE: Good governance is one of the major concerns of overseas investors. The World Bank has indentified six 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)-that lend credence to the likelihood that the government will be destabilised or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism, (3) Government effectiveness (GE) - perceptions of the quality of public services, the quality of civil service and the degree of its independence from political pressure, the quality of policy formulation and implementation, and the credibility of the government's commitment to implementing such policies, (4) Regulatory Quality (RQ)-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) -the perception of the extent to which agents abide by the rules of society, the quality of contract enforcement and property rights and have confidence in the police and the courts, and (6) Control of Corruption (CC) - the perception of the extent to which public power is exercised for private gain, including both petty and major corruption. These six indicators are poor in the regional and global context.

Despite all these odds, the Organisation for Economic Cooperation and Development (OECD) upgraded Bangladesh's country risk classification to five from six on June 26 in 2015. Bangladesh graduated from the low income status to lower middle income nation (LMIC) meeting the World Bank's requirements comfortably. A country is categorised a low income one, if its GNI is less than $1,045. It is a lower middle income country, if the GNI is $1,046-$4,125. The higher middle income status requires the GNI of $4,126-$12,735 and the higher income country requires a GNI of more than $12,735.

A recent decision of the government bars companies with full foreign ownership from obtaining any fresh licence for freight forwarding (FF) business in a bid to favour the local companies. Only joint venture and local companies will be able to obtain any new licence for freight forwarding from the current fiscal year (FY) 2015-16, customs rules say. The new move that restricts the fully-owned foreign companies in the business is suicidal in view of the government's efforts to attract foreign direct investment (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.

Md. Abdullah-Al-Mamun (Badshah)
Assistant Director, Daffodil International University &
‚ÄčOperation Manager, Skill Jobs