Bangladesh exporters say the falling euro and ongoing political unrest are hurting orders

Bangladesh exporters say the falling euro and ongoing political unrest are hurting orders

Bangladesh's textile and clothing exporters, still reeling from the impact of continuing political unrest in the country, now say they are facing a second shock wave: the freefall of the euro.

Industry lobbyists and analysts fear the decline in value of the European single currency will cut exporters’ profit margins, weakening their ability to compete in the 19 countries using the euro. Analysts say that Bangladeshi exporters may have to resort to currency hedging and market diversification to maximise sales and returns.

Data from the country’s central bank, the Bangladesh Bank, indicates that the value of the euro against the Bangladesh taka (BDT) has fallen by 17% since 1 July 2014. The euro was trading at BDT88.20 per EUR1 on 26 February.

This shift is of special concern to Bangladesh’s clothing sector as the euro-area is the country’s biggest trading partner, representing three-quarters of its annual merchandise shipments (of all kinds of goods).

“This (euro fall) is having serious repercussions. It’s like a double whammy,” Md Atiqul Islam, president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), told just-style, regretting that it has coincided with political unrest that has – among other things – seen transport blocked on Bangladesh roads.

“If this [euro] trend continues, we’ll lose out to our competing countries,” he said, adding that the “political turmoil will have a negative impact in the long run.

"Buyers have stopped visiting Bangladesh. They say ‘you come to us for meetings’,” he added.

AKM Salim Osman, president of the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA), has similar concerns. He said both problems are dragging down orders, forcing knitters to curtail production in the past two months by 40%. The problems are all the more galling because they are preventing Bangladesh companies from “benefitting from the price fall of oil and cotton in the international market. People are not buying raw materials,” he told just-style.

Dr Zahid Hussain, lead economist of The World Bank in Dhaka, agreed that the depreciation of the euro will have an ‘adverse’ impact on the profits of exporters who export to the eurozone: “Prices are fixed in the euro and so exporters will get less taka against the same amount of the euro,” he said, adding that the impact will be determined by “how long the euro remains weak.”

Dr Abul Basher, a research fellow with state-backed think-tank the Bangladesh Institute of Development Studies, suggested that businesses should opt for hedging against the volatility of exchange rates, where they can.

Another tactic, Dr Basher argued, is to diversify into other markets. “Two of the three largest economies of the world are located in Asia: India and China together account for about 45% of the world's population, pointing to a huge potential as destination markets for Bangladesh,” he told just-style.

While the European Central Bank’s (ECB) policy of quantitative easing has depreciated the euro, Dr Hussain said there might be a silver lining if ECB bond purchases achieve their objective of stimulating the eurozone economy. “In that case, the adverse effects on profit may be counteracted by positive demand effects,” he said.

In the seven months to January, Bangladesh earned US$14.4bn from exports of woven and knitted garments, the government’s Export Promotion Bureau said.

There are a few bright spots. Dhaka-based apparel maker Ananta Group, which made US$165m last year in overseas sales, has emerged unscathed by the euro’s plunge, even if more than 60% of its products are destined for Europe, because it prices product in US dollars.

“We’re exporting in dollars even to Europe, so the euro [slide] does not affect us,” Sharif Zahir, the company’s managing director, told just-style.

But Dr Basher warned that even the exporters, who receive export income in the euro-area in US dollars, will “now face the pressure to reduce the price of their exports” given retailers sell in euro and it has depreciated against the USD as well.

Risk from political violence
Meanwhile, four leading business bodies including the BGMEA and BKMEA are said to have filed court orders at the weekend seeking restrictions on the hartal and blockades that have persisted in the country since the first week of January.

So far more than 110 people have been killed in the political violence being conducted largely by two sides: supporters of the government of Sheikh Hasina and the Awami League, and supporters of an opposition alliance led by Khaleda Zia of the Bangladesh Nationalist Party.

In January, a leading credit ratings firm warned prolonged unrest would dent investor confidence in the country and raise risks to growth in the key ready-made garment (RMG) sector.

Fitch Ratings noted that while the Bangladesh economy has proven relatively resilient to political protests and blockades in the past: "The deeper structural risk to Bangladesh from the ongoing polarisation and repeated outbreaks of violence is the potential impact this could have on long-term foreign investment decision-making.

"Moving factories to other countries and changing big suppliers take time. As such, it would be difficult to gauge in the short term the extent to which a continuation of violence would affect foreign investor confidence in Bangladesh as a production centre.”

The RMG sector is a key element in Bangladesh's development strategy and makes up 81% of exports, equivalent to 15% of GDP.

"The concentration of exports in this sector means that a structural slowdown in the sector or any broader trend to transfer production assets to other countries would threaten Bangladesh's long-term growth potential and risk a potentially dramatic deterioration of the external balances including the current account flipping from surplus to a large deficit," the ratings agency concluded.