Fitch Ratings has affirmed Bangladesh’s Long-Term Foreign- and Local-Currency Issuer Default Ratings at ‘BB-‘. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at ‘BB-‘ and the Short-Term Foreign-Currency IDR at ‘B’. KEY RATING DRIVERS Bangladesh’s rating balances strong foreign-currency earnings and high and stable real GDP growth against significant political risk and weak banking-sector health.
Strong and relatively stable foreign-currency revenue from remittances and garments exports, two main pillars of Bangladesh’s economy, support the external balances and overall credit profile. Bangladeshi exports have only been moderately affected by the current global trade slowdown: exports grew 5.9% over the year to January 2016, compared with 9.0% a year earlier. Remittances also remained strong at USD15bn on an annual basis in February 2016, dwarfing the roughly USD3bn 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 US dollar, have led to a build-up of foreign reserves to a record-high of USD28.3bn 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 IMF. 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% is high relative to the ‘BB’ category median of 4.0%. Fitch expects growth to reach 6.7% in the financial year to 30 June 2016 (FY16) and 6.8% in FY17, slightly below the authorities’ forecasts of 7.1% and 7.2% respectively. Increased purchasing power from public-sector wage hikes and monetary policy loosening in January 2016 should support this growth.
Inflation is also relatively high compared with peers, averaging 6.1% in the first eight months of FY16, but close to the authorities’ target of 6.2% set for the entire financial year. 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 polarization 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 ready-made garments, from doing business in Bangladesh. 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 World Bank’s Ease of Doing Business report. Bangladesh reached the World Bank’s lower middle-income status in July 2015, but GDP per capita of USD1,291 remains well below the ‘BB’ peer category median of USD4,087. Bangladesh’s general government debt of 33.7% of GDP in FY15 compares well to the ‘BB’ median of 42.5%.
However, the government’s revenue intake of 9.8% of GDP is the second lowest of 113 rated sovereigns after Nigeria, implying limited fiscal space to boost badly needed infrastructure development. Implementation of the new VAT, planned for mid-2016, will likely boost revenues. However, the impact will depend on the final tax-rate and degree of tax compliance. 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% 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% in 4Q15 and 21.5% for public-sector banks. Recent changes in Bangladesh Bank’s leadership after the theft of USD101m of its foreign reserves may impact banking-sector policies.
RATING SENSITIVITIES The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are well-balanced. The main factors that individually, or collectively, could trigger positive rating action are: – An improvement in governance, which would strengthen the business climate and could improve banking sector health – 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 The main factors that individually, or collectively, could trigger negative rating action are: – Protracted substantial economic disruption from materialising political risk – Deterioration in the banking sector’s asset quality, prompting substantial government support, or other developments causing public finances to deteriorate so that there is a significant rise in the government debt-to-GDP ratio Key Assumptions – The global economy performs broadly in line with forecasts in Fitch’s Global Economic Outlook, including world GDP growth of 2.5% in 2016 and 2.9% in 2017 and Brent oil price averaging at USD35 per barrel in 2016 and USD45 in 2017.
