Hong Kong (BBN)- 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-‘.
Bangladesh’s ratings reflect a balance between high, stable real gross domestic product (GDP) growth and strong external balances, and weak structural features indicating significant political and banking sector risk, the rating agency said on Friday.
Bangladesh’s real GDP growth at 6.2 per cent over the past five years is strong compared with the median 4.0 per cent growth rate for its ‘BB’ category peers.
Fitch expects growth to remain around this level – at 6.3 per cent for the financial year ending 30 June 2015 (FY15) and FY16. Inflation, however, averaged 8.1 per cent over the past five years and was 7.3 per cent over the 12 months ended July 2014. This is higher than the ‘BB’ peer category median of 4.6 per cent and above the central bank’s target of 6.5 per cent by end-FY15.
The rating agency also said 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,” it noted.
The banking sector is vulnerable to shocks, especially the state-owned banks, as both asset quality and governance are weak, according to the rating agency.
The gross non-performing loans ratio of the sector increased to 10.5 per cent in first quarter (Q1) of calendar year 2014 from 8.9 per cent in Q4 in the last year, while the ratio for state-owned banks only was 21.9 per cent in Q1 this year.
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 US$1,023 in 2013, well below the ‘BB’ peer category median of US$4,696.
Both the general government debt (40 per cent of GDP) and fiscal deficit (5.0 per cent of GDP) compare unfavourably with the ‘BB’ category medians of 35 per cent and 2.7 per cent respectively.
A disappointing government revenue intake has led to a higher fiscal deficit of 5.0 per cent of GDP than the targeted 4.6 per cent, it said, adding that the budget for FY15 targets the fiscal deficit to remain at 5.0 per cent of GDP, suggesting that no fiscal consolidation efforts can be expected of this government anytime soon.
“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,” it mentioned.
BBN/SSR/AD-29Aug14-11:50 pm (BST)
