Fitch, a leading global credit rating agency, has maintained its ‘BB-‘ rating for Bangladesh, due to its foreign currency earnings and high and stable real economic growth.
Strong and relatively stable foreign currency revenue from remittances and garment exports support the external balances and overall credit profile, the New York-based agency said yesterday.
Exports have only been moderately affected by the current global trade slowdown, growing at 5.9 percent over the year to January 2016, compared with 9 percent a year earlier.
Remittances also remained strong at $15 billion on an annual basis in February 2016, dwarfing the roughly $3 billion annual inflow of foreign project-based aid.
At the same time, weak global conditions imply downside risks to foreign demand for exports and Bangladeshi workers abroad.
Inflows, combined with Bangladesh Bank’s foreign exchange interventions aimed at keeping the taka relatively stable against the dollar, have led to a build-up of foreign reserves to a record high of $28.3 billion in March 2016.
The authorities’ macroeconomic track record was strengthened by Bangladesh’s successful completion in October 2015 of its Extended Credit Facility arrangement with the International Monetary Fund.
Real GDP growth remained relatively strong and stable over the past years, even during times of political turmoil and natural disasters.
Bangladesh’s five-year average real GDP growth of 6.3 percent is high relative to the ‘BB’ category median of 4 percent, Fitch said.
The agency expects growth to reach 6.7 percent in the year to June 30, 2016 and 6.8 percent in the next fiscal year, which is slightly below the government’s forecasts of 7.1 percent and 7.2 percent respectively.
Increased purchasing power from public sector wage hikes and monetary policy loosening in January 2016 should support the growth, it said.
Inflation is also relatively high in comparison to peers, averaging 6.1 percent in the first eight months of the current fiscal year, but close to the government’s target of 6.2 percent.
The return to relative calm after political violence erupting in the first quarter of 2015 is positive, but political risk remains substantial.
Continued strong political polarisation could again lead to widespread violence and blockades, especially near the time of parliamentary elections, which will be held no later than January 2019.
“Political turmoil or terrorism could inflict long-term economic harm if it deters foreign investors and buyers, especially of readymade garments, from doing business in Bangladesh,” Fitch said. Bangladesh scores poorly on a broad range of structural indicators, including the World Bank’s governance indicator (23rd percentile versus the ‘BB’ median of 45th percentile). The difficult business environment is illustrated by the country’s 174th ranking out of 189 countries in the WB’s Ease of Doing Business report.
Bangladesh reached the WB’s lower middle-income status in July 2015, but GDP per capita of $1,291 remains well below the ‘BB’ peer category median of $4,087.
Government debt of 33.7 percent of GDP in fiscal 2014-15 compares well to the ‘BB’ median of 42.5 percent.
However, the government’s revenue intake of 9.8 percent of GDP is the second lowest of the 113 rated sovereigns after Nigeria, implying limited fiscal space to boost badly needed infrastructure development. The rating agency said the implementation of the new VAT law, planned for mid-2016, is likely to boost revenues. However, the impact will depend on the final tax rate and the degree of tax compliance.
It said the risk of banking sector contingent liabilities crystallising for the sovereign is substantial, although the small size of the banking sector, with loans of just 35.9 percent of GDP, would moderate the impact.
“The sector’s health and governance standards are generally weak, particularly in public sector banks.”
Non-performing loans remained high for the banking sector as a whole at 8.8 percent in the fourth quarter of fiscal 2014-15 and 21.5 percent for public sector banks.
Recent changes in the Bangladesh Bank’s leadership after the theft of $101 million of its foreign reserves may impact banking sector policies. To step up the rating, Bangladesh will have to improve governance, which would strengthen the business climate and could enhance banking sector health, and sustained stronger real GDP growth, which would bring GDP per capita more in line with peers.
This could be, for instance, supported by a political environment that is more conducive for economic activity.
On the other hand, protracted substantial economic disruption from materialising political risk and deterioration in the banking sector’s asset quality could trigger negative rating action, according to Fitch.
