From London Fashion Salons to Bay of Bengal, Brexit Looms Large

(Bloomberg) -- Some 8,000 kilometers from London’s busy shopping districts, the economic ripple effects of Brexit are being felt in one of the world’s poorest nations.

In Bangladesh, garment makers typically charge in U.S. dollars. For U.K retailers, that means import costs are rising in line with sterling’s 16 percent slump since Britain’s June vote to leave the European Union. Reluctant to raise prices for shoppers, big high street brands are squeezing suppliers instead.

For the densely populated nation of 160 million by the Bay of Bengal, that stings. Garments account for about 80 percent of exports and the U.K. is the nation’s third-largest market. Fazlul Hoque, managing director of Plummy Fashions that supplies garments to Next Plc and Primark is among those feeling the Brexit pinch.

“We are in a price war and we are getting pushed from all sides to lower prices," he said. "British retailers are sending us a common message that the situation will be worse in future."

A spokesperson for Primark said the firm has long standing relationships with their suppliers in Bangladesh, is mindful of their cost base and is assisting them to boost their productivity. The spokesperson added that the company believes suppliers are often able to share some of their dollar gains with Primark and reiterated the company’s margins will be impacted by the strong dollar. A spokesman for Next declined to comment.

So far, Bangladesh’s economy is holding up, but there are worries. The Dhaka-based Centre for Policy Dialogue warned in a report last month about the negative impact of Brexit and its implications for future market access.

Listed by the United Nations as one of the world’s least developed countries, Bangladesh has made strides in recent decades to combat poverty. Yet challenges remain, with around 47 million still below the poverty line.

The World Bank forecast growth of 6.8 percent in the fiscal year ending June 30, lower than the official estimate of 7.1 percent in the previous fiscal year. The central bank has forecast growth of 7.2 percent.

Trade Uncertainty

It’s not just the impact of a weaker sterling that’s weighing on trade. Bangladesh is also on edge over what kind of tariff regime the U.K will adopt once it formally leaves the E.U., which could erode the preferential access that the South Asian nation now enjoys in Europe.

"My concern is with the uncertainty the Brexit vote brings, it may lead to temporary suspension of the duty-free market access for all products for Bangladesh exporters," said Bharti Bhargava, economist at Oxford Economics in Singapore.

To be sure, the U.K economy is defying expectations and the Bank of England has upgraded its growth and inflation forecasts. That bodes well for clothes retailers. It’s also the case that the dollar’s rally could fizzle out, easing pressure on the pound.

Trump Factor

Then there’s Donald Trump. If he plows ahead with steep tariffs on Chinese made goods, it could force production into cheaper bases including Bangladesh, according to Steven Englander, global head of Group-of-10 currency strategy at Citigroup Inc.

Still, in Bangladesh, suppliers are anxious. Abdus Salam Murshedy, managing director of Envoy Group, which supplies big U.K retailers such as Next, said he’s on edge amid increasing pressure to lower his prices. Sales to Next rose 11 percent year-on-year to $10 million in 2016, according to Murshedy, while Envoy’s total sales amounted to $260 million.

“We are coming under tremendous pressure to keep prices low,” he said. "As their cost of business rose with the devaluation of the British pound, they focused more on Bangladesh to buy more from here but at lower prices. That’s their strategy.”

--With assistance from Sam Chambers

To contact the reporters on this story: Arun Devnath in Dhaka at adevnath@bloomberg.net, Enda Curran in Hong Kong at ecurran8@bloomberg.net.

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Brian Bremner