The New-York based global rating agency, Fitch Ratings, has assigned Bangladesh long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BB-’.
The outlooks on the long-term IDRs are stable. Fitch has also assigned a short-term foreign currency IDRsat ‘B’ and a country ceiling at ‘BB-’, according to a Fitch statement released on Friday.
This is for the first time Fitch rated Bangladesh after the government allowed the central bank to sign an agreement with the rating agency in February this year.
Two other global rating agencies – Standard &Poor’s and Moody’s –are also providing the ratings for Bangladesh since 2010.
Standard and Poor’s and Moody’s in their latest reviews on Bangladesh rated BB- and Ba3 respectively and kept its “stable outlook” for the fifth consecutive year.
The key rating drivers for Bangladesh’s rating reflects a balance between high, stable real GDP growth and strong external balances and weak structural features indicating significant political and banking sector risk, the statement said.
More specifically, it said Bangladesh’s real GDP growth at 6.2% over the past five years was strong compared with the median 4% growth rate for its ‘BB’ category peers.
The Fitch expects growth to remain around 6.3% for the financial year ending June 30 of 2015 and FY16.
The inflation, however, averaged 8.1% over the past five years and was 7.3% over the 12 months ended in July 2014, it said.
This is higher than the ‘BB’ peer category median of 4.6% and above the central bank’s target of 6.5% by the end of FY15.
“Political tensions and violence that marked the run-up to the parliamentary elections in January 2014 had a moderately negative impact on economic growth, but did not paralyse the economy,” said the agency.
This most recent episode in Bangladesh’s political history highlights prolonged high political risk levels, it said, adding that the continued political polarisation and uncertainty may impact economic activity through long-term investment decisions.
According to the Fitch, the banking sector is vulnerable to shocks, especially the state-owned banks, as both asset quality and governance are weak.
The gross non-performing loans ratio of the sector increased to 10.5% in 1Q of calendar year 2014 from 8.9% in 4Q13, while the ratio for state-owned banks only was 21.9% in 1Q14.
The global rating agency expects that the state-owned banks would need additional capital in the medium term, which would imply crystallisation of contingent liabilities for the sovereign.
Bangladesh’s ratings are constrained by a low level of development. The country scores poorly on a broad range of governance indicators and ranks low on the United Nations’ human development indicators, with a GDP per capita of $1,023 in 2013, well below the ‘BB’ peer category median of $4,696.
A disappointing government revenue intake has led to a higher fiscal deficit of 5% of GDP than the targeted 4.6%, the Fitch said.
It adds that the budget for FY15 targets the fiscal deficit to remain at 5% of GDP, suggesting that no fiscal consolidation efforts can be expected of this government anytime soon.
Bangladesh’s current account surplus (1.7% in calendar 2013) and low and falling net external debt (to 1.3% of GDP in calendar 2014 from 1.6% in 2013) compare favourably with peers.
“The current account is supported by the continued strong ready-made garment exports and remittance from workers overseas.
This shows a comparative advantage of Bangladesh’s large unskilled population,according to the Fitch.
Limited diversification implies a risk in case the ready-made garment sector or remittance face an external shock, it added.
However, the Fitch states that the stable outlook reflects Fitch’s assessment that upside and downside risks to the ratings are well-balanced.
The main factors that individually, or collectively, could trigger positive rating action are the governance reforms that would lead to a strengthened business environment.
The rating agency also stressed substantial strengthening of the balance sheets and governance in the banking sector.
The main factors that individually, or collectively, could trigger negative rating action are protracted substantial disruption of economic activity as a result of materialising political risk, greater than expected deterioration in the banking sector’s asset quality and prompting substantial government support.
The Fitch, however, felt that both Bangladesh’s ready-made garment exports and remittance from workers abroad continue to be strong, supporting the relatively favourable current account balance levels compared with the peers.
