Asia Frontier Capital Newsletter – Country Snapshot: Bangladesh

With over 160 million people, a young and cheap labor force and a strategic location between India and China – two of largest engines of global economic growth over the past decade – Bangladesh maintains strong prospects for extended economic growth.
The extent of Bangladesh’s growth will largely depend on its leaders’ ability to improve economic and diplomatic ties among its neighbors. Completion of a highly anticipated Indo-Bangladeshi free-trade agreement will help spur Bangladesh’s already surging garment, pharmaceutical, and software industries. Bangladesh has also begun to construct large infrastructure projects, such as electrical power plants, to address domestic and regional energy needs. In addition, with 50% of its workforce in the service sector, Bangladesh has the potential to become an offshore centre for outsourcing, which would help to further diversify its economy.

Stock Market:

Bangladesh has two separate stock exchanges, the Dhaka Stock Exchange (DSE – established on 28th of April 1954) and the Chittagong Stock Exchange (CSE – established on 4th of November 1995). The DSE has a total of 274 listed companies with a market capitalization of USD 41.9 billion. The CSE hosts 246 companies and has a market capitalization of USD 33.7 billion as of February 2015.

Country snapshots for all of AFC’s markets can be found on our website at www.asiafrontiercapital.com

AFC Country Report: Bangladesh

Amidst all the talk of Asia’s high-potential emerging economies – particularly the media frenzy surrounding Myanmar in the aftermath of the country’s reforms – neighboring Bangladesh is perpetually ignored. This bustling country of 156 million people, the 8th largest in the world, seems to only be featured in global news media when something bad has happened. Whether it was the 2013 Rama Plaza factory building collapse, the Nov 2014 death sentence handed down to the leader of Jamaat-e-Islami, the country’s main religious party, or the violent protests and street blockades in January 2015 led by the opposition political party, the Bangladesh Nationalist Party (BNP), many outside observers’ perceptions are largely shaped by the depressing stream of events trickling out of Bangladesh.

Despite the troubling headlines, Bangladesh does have some attractive investment characteristics. Its enormous population is famously hard-working, with established industries in textiles, manufacturing, pharmaceuticals, and chemicals, and also young – the median age in the country is 24 years old. As wages and labor costs have risen in China’s traditional manufacturing strongholds, factory owners have begun looking elsewhere to relocate their factories to cheaper destinations. Many factories have moved to Vietnam and Cambodia, but Bangladesh has also positioned itself as an attractive potential landing spot.
In the aftermath of several high-profile factory disasters and worker protests, the minimum wage for Bangladeshi garment workers was raised by 79% in November 2013 to USD 69/month, prompting concerns by factory owners that the country’s key export industry would become less competitive and lose business to other regional low-cost manufacturing destinations. However, a similar trend of wage increases in Asia’s garment producing hubs has unfolded in recent years, with violent crackdowns on striking textile workers in Cambodia leaving a black eye on the country’s biggest export industry and prompting a 60% increase from USD 80/month in 2013 to the new figure, USD 128/month, that was agreed upon in November 2014.

In Laos, ongoing labor talks may raise the country’s minimum wage to USD 99-111/month as early as March 2015, while wages in Vietnam have been raised to reach USD 101-146/month depending on the region, and Thailand’s minimum wage is roughly USD 202/month. In Myanmar, a minimum wage law was only introduced in March 2013, and the Ministry of Labor has still not formally announced what the official minimum wage will be, although the current minimum wage for public sector employees is about USD 50/month. Despite the large increase in percentage terms in Bangladesh’s minimum wage in 2013, the country still remains very competitive and generally cheaper than its Southeast Asian rivals.

In an industry like ready-made-garments (RMG), however, profit margins are razor thin and many Bangladeshi factory owners worry about the costs and delays that will occur due to the increasing regulation and oversight of the country’s biggest export industry. Significant progress has been made to improve the monitoring of the safety of the country’s factories, including the establishment of the Accord on Fire and Building Safety in Bangladesh, a 5-year legal agreement between international labor organizations, NGOs, and retailers in the textile industry signed in May 2013 to maintain minimum safety standards in the textile industry, and the Alliance for Bangladesh Worker Safety, a group of 26 major global retailers representing the majority of North American imports of Bangladeshi RMGs formed in 2013 that has launched the Bangladesh Worker Safety Initiative to improve safety conditions in the country’s factories. Local factory owners complain, however, that the massive overhaul and costs of safety compliance will threaten their competitiveness and endanger the overall industry that employs millions of Bangladeshis.

Many high-volume factories in the country depend on sub-contracting to smaller firms to meet last minute orders, and the expensive and time-consuming process of inspections, structural upgrades, and fire / electrical equipment fixes is manageable for larger factories with wealthy owners but often too burdensome for smaller sub-contractors. Some in the industry have expressed concern that Bangladesh’s competitive advantage of being an “agile” production base may be jeopardized if producers cannot comply fully to the new safety standards. According to the IFC, the costs of mandatory upgrades will cost owners between USD 100,000 to 1 million. However, several US apparel manufacturing firms say they have made investments to help improve factory safety and some have guaranteed loans for the IFC and Bangladesh’s BRAC Bank to disburse to domestic factories.

Despite improvements in safety and oversight in the textile industry, the economy has already encountered a substantial obstacle in 2015 with ongoing transport blockades organized by the opposition political party, the Bangladesh Nationalist Party (BNP), to protest the detention of their leader, Khaleda Zia. The ongoing blockade is costing Bangladesh’s transport sector alone USD 26 million per day due to delays and road blocks, and businesses are being pummeled by disruptions to vital components of their supply chain such as the import and distribution of raw materials and intermediate inputs. The transport blockade has increasingly become violent, with the death toll recently surpassing 50, more than 7,000 arrested, and widespread arson of commuter buses and cars. From the 5th to 23rd of January, an organization of businesses estimated that the economic loss caused by the protests and transport blockade was equivalent to 2.7% of the country’s GDP, contributing to delays in goods shipment and rising prices for products across the country.

Bangladesh’s capital markets have slumped in response to the turmoil, with both the Dhaka and Chittagong stock exchanges falling significantly in the month of January. Sadly, such chaos and calamity has become relatively common in Bangladesh, but the general investment thesis of a growing consumer class in the world’s 8th largest country and an emerging low-cost manufacturing hub remains intact despite the many bumps in the road that we expect for the country.

On a brighter note, from a macroeconomic standpoint, one global trend that should have a positive impact on Bangladesh is the fall in oil prices in recent months. Through the end of January 2015, oil had posted seven consecutive months of losses for the first time in history, with Brent falling 50% and sinking to a six-year low. Bangladesh is a net importer of oil, importing 5 million tonnes of fuel oil and 1.3 million tonnes of crude oil annually. For Bangladesh, lower oil prices should boost the country by stimulating domestic spending, raising purchasing power, contributing to sizeable foreign exchange savings, and reducing the cost of living through lower transport, fuel, and electricity costs. The economic stimulus effect will ultimately depend on the cost saving that is passed on to the consumer via lower petroleum prices in the domestic market, as the sole oil importer is the state-owned Bangladesh Petroleum Corporation (BPC).

AFC Travel Report: Bangladesh

In line with our process of being on the ground in the countries we invest in, AFC’s CEO Thomas Hugger, recounts some of his experiences from his travels to Bangladesh in January 2015.
The first major challenge upon arrival in Bangladesh is simply deplaning and exiting Dhaka International Airport, which perfectly mirrors the chaotic and hectic street life outside. Standing in the slow-moving lines at the immigration counters, one notices that every few minutes, “VIP” persons jump the queue, guided by various touts making their living from this line-jumping hustle and further lengthening the waiting time which seems to take a particularly long time in Bangladesh as each traveler’s passport and visa details are carefully scrutinized. The next stop is the bustling, chaotic, and tiny baggage claim area in which one is immediately surrounded by other weary travelers jockeying for position to grab their bags off of the conveyor belt. Constant bumping and body contact, one soon realizes, is the norm in Bangladesh.

Every time I arrive in Dhaka, I wonder how so many passengers could have fit on a Boeing 777… where were they all during the flight? Then I remember that Bangladesh is itself an anomaly to the general notion of population density. The country is roughly the size of Iowa with a population of about 156 million, which is more than 50x that of America’s small Midwestern state!

The overflowing baggage terminal at Dhaka Airport

Fortunately we (I was traveling together with the new AFC Umbrella Fund Director Henry Looser) were able to leave through a side exit for “VIP” guests and thus avoided the hectic atmosphere at the regular exits where dozens of touts are waiting to haggle, hustle, and offer their transportation services into Dhaka.

New AFC Umbrella Fund Director Henry Looser escaping the touts through the airport’s VIP exit

We arrived on a Sunday, the first working day of the week in Bangladesh (87% of the population is Muslim). With a population of about 156 million, Bangladesh is the 8th most populous country in the world and the most densely-populated large country in the world (less populated city-states like Macau, Monaco, and Vatican City slightly edge out Bangladesh at the top of the rankings).

Normally, Sunday is a very busy day on the street since schools and businesses restart after a two day weekend. On this visit, however, we were greeted by a general countrywide strike (hartal) which was started by the opposition party on 5th January 2015 exactly one year after the 2014 parliamentary election which the opposition party BNP had boycotted. The hartals in Bangladesh are unfortunately often quite violent with street blockades and attacks on property and public transport, including the burning of buses. The day we arrived, the countrywide death toll had already reached 25 lives. Despite the hartal, we experienced quite a lot of traffic on the highway from the airport to Gulshan (the new business district in Dhaka) due to a religious procession (Ijtema) which takes place in Tongi, not far from the airport, and is considered the third largest Muslim congregation in the world after the Arbaeen gathering in Kerbala, Iraq and the Hajj in Mecca, Saudi Arabia. We arrived safely at our hotel in Gulshan after passing various police checks.  Entering our hotel was like entering the transit area of an airport with security checking and x-rays screening the luggage.

The next day I was astonished to discover that when I tried to send out a Whatsapp message to my wife in Hong Kong, the service was shut down, together with other internet-based services (Tango, Viber, Line). Apparently, the government has blocked these instant messaging apps because the opposition BNP used these services to organize blockades.

The view from my hotel room at 8.00am in the middle of Gulshan/Dhaka;
on a normal day the roads are packed with cars!

Due to the ongoing hartals, many of the confirmed meetings with companies were unfortunately canceled due to security reasons (it was deemed to be unsafe to travel outside of Gulshan district due to ongoing road blockages). Nevertheless, we were able to visit several companies that we have invested in. The first meeting was with British American Tobacco Bangladesh, which is 73% owned by BAT, UK and 10% by Investment Corp Bangladesh. We met with the company secretary, who was very proud to inform us that his company is the country’s largest taxpayer. BAT’s products (Benson & Hedges) cover the low, medium, and premium ranges and the company has a 99% market share in the premium segment (Marlboro has 1%!) and 50% in the medium and low range. There is an even lower segment, the “bidis” (“beedi” in India or Sri Lanka) which are hand rolled sticks commonly smoked by the poor. The price for 25 bidis is around BDT 7 (USD 0.09) compared with BDT14 (USD 0.18) for 10 low segment cigarettes or BDT 80 (USD 1.03) for 10 premium cigarettes.

Another company we were able to see was the Bangladeshi subsidiary of a multinational pharmaceutical company which is listed on the Dhaka Stock Exchange (“DSE”). 75% of the company’s products are produced in Chittagong, Bangladesh and the rest are imported. Surprisingly, the company executives complained about the preferential treatment of local companies in Bangladesh. As soon as one pharmaceutical product is produced in Bangladesh, foreign imports are not allowed anymore.

We held additional company visits with one of the largest denim producers in Bangladesh, which has started to diversify vertically, and with the largest producer of acrylics (used for textiles, paint, fiberglass, and plastics) in Asia. Like many other Bangladeshi companies, both of these companies were suffering in January, despite record months in November and December, from the ongoing political unrest since it is too dangerous to transport finished goods by truck to the port in Chittagong for shipping. It is estimated that one day of hartal costs the entire economy USD 500 million, USD 45 million of which is solely garment exports!

Traditional transportation in Dhaka’s congested streets

In summary, my few days in Dhaka confirmed AFC’s overall view. Bangladesh has great long term potential, if and when the politics are right. I have been traveling to Bangladesh frequently since 1997 and on each trip, I notice how the country has progressed since my last visit: expanding and improving infrastructure, for example, and gradual wealth generation which is lifting people from absolute poverty to low income earners. This wealth generation has, unfortunately, still eluded many Bangladeshis, primarily due to political instability and general bureaucracy. When I look at other countries in the AFC universe like Cambodia or Myanmar, I see them overtaking Bangladesh soon. However, with the ongoing shift in low cost manufacturing, particularly in textiles and ready-made-garments (“RMG”), to cheaper destinations, Bangladesh is well-positioned to be a major beneficiary thanks to its existing RMG industry and infrastructure which will result in general economic growth benefitting many of the hard-working people of Bangladesh.

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