(The following statement was released by the rating agency)
Fitch Ratings has assigned Bangladesh Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of ‘BB-‘. The Outlooks on the Long-Term IDRs are Stable. Fitch has also assigned a Short-Term Foreign Currency IDR of ‘B’ and a Country Ceiling of ‘BB-‘. KEY RATING DRIVERS Bangladesh’s ratings reflect a balance between high, stable real GDP growth and strong external balances, and weak structural features indicating significant political and banking sector risk.
More specifically, the ratings reflect the following key rating drivers: – Bangladesh’s real GDP growth at 6.2% over the past five years is strong compared with the median 4.0% growth rate for its ‘BB’ category peers. Fitch expects growth to remain around this level – at 6.3% for the financial year ending 30 June 2015 (FY15) and FY16. Inflation, however, averaged 8.1% over the past five years and was 7.3% over the 12 months ended July 2014. This is higher than the ‘BB’ peer category median of 4.6% and above the central bank’s target of 6.5% by end-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. This most recent episode in Bangladesh’s political history highlights prolonged high political risk levels. Continued political polarisation and uncertainty may impact economic activity through long-term investment decisions. – 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. Bangladesh Bank seems committed to strengthen the poor governance in the banking sector, but has indicated it would need more extensive powers. Fitch expects 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 USD1,023 in 2013, well below the ‘BB’ peer category median of USD4,696. – Both the general government debt (40% of GDP) and fiscal deficit (5.0% of GDP) compare unfavourably with the ‘BB’ category medians of 35% and 2.7% respectively.
A disappointing government revenue intake has led to a higher fiscal deficit of 5.0% of GDP than the targeted 4.6%. The budget for FY15 targets the fiscal deficit to remain at 5.0% of GDP, suggesting that no fiscal consolidation efforts can be expected of this government anytime soon. – The IMF Extended Credit Facility programme is on track and the Bangladesh authorities have secured four of the program’s six tranches so far and met several structural benchmarks, including those related to the implementation of a new VAT, and establishment of internal controls and compliance and full automation of financial reporting in the state-owned banks. Inclusion of strong fiscal performance criteria in a potential follow-up programme could result in the build-up of a credible fiscal consolidation track record. – 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 continued strong ready-made garment exports and remittances from workers overseas. On the one hand, this shows the comparative advantage of Bangladesh’s large unskilled population. On the other hand, limited diversification implies a risk in case the ready-made garment sector or remittances face an external shock. 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: – Governance reforms that would lead to a strengthened business environment and, hence, higher sustainable growth levels. – Substantial reduction of political risk, for instance through reduced polarisation between the main political parties, which would make future disruptions of economic activity less likely. – 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, prompting substantial government support. – Deteriorating public finances to such an extent that it would lead to a significantly rising government debt to GDP ratio. KEY ASSUMPTIONS – Both Bangladesh’s ready-made garment exports and remittances from workers abroad continue to be strong, supporting the relatively favourable current account balance levels compared with peers. – Continued donor support ensures external debt servicing at low cost and long maturities.