Dhaka, Bangladesh (BBN)- The global credit rating agency Moody’s has rated Bangladesh’s outlook as stable again for the current year, but cautioned that some factors including political disturbances and deterioration in the balance of payment might affect its rating.
The outlook for Bangladesh is ‘Ba3’ with the short-term foreign and local currency ratings affirmed at ‘not prime’, the Moody’s said on Thursday last.
The credit rating agency has rated Bangladesh’s outlook as stable for the fifth consecutive year.
“Moody’s affirmation of the ratings with the stable outlook is based on the view that Bangladesh’s underlying credit strengths have withstood the impact of recent political tensions, industrial accidents in the garment industry, and the poor financial health of state-owned commercial banks,” the US-based Moody’s Investors Service said in a statement.
The sovereign credit rating is a strong tool for positioning Bangladesh in the global financial arena by providing relevant information and related indicators about the country’s overall economic situation, experts said.
The country’s local currency country risk ceiling is affirmed at Baa3, while the long-term foreign currency bond and bank deposit ceilings are affirmed at Ba2 and B1, respectively.
“These ceilings act as a cap on ratings that can be assigned to the foreign and local currency obligations of entities domiciled in the country,” the rating agency explained.
The Moody’s said political uncertainty is likely to lead to some investment delays while a contraction in remittances from workers abroad will depress consumption expenditure.
However, increases in minimum wages in the garment industry and in civil servants’ allowances, as well as dissipating political tensions are expected to contribute to a recovery in consumption, it observed.
“Pressures on the balance of payments that emerged in 2011 have eased, with the current account reverting to a surplus. Although remittance inflows have contracted, export growth so far has withstood the international scrutiny facing the garments industry,” it noted.
The Moody’s also said despite political turbulence and headwinds to the garment industry on the back of a number of industrial accidents, the outlook for economic growth remains largely favourable.
“We estimate that real gross domestic product (GDP) growth moderated only mildly, to around 5.8 per cent year-on-year in the fiscal year ending June 2014 (FY2014), from a 6.2 per cent average over the last decade. Even factoring in this deceleration, Bangladesh’s growth during 2003-13 has been significantly above the median for Ba- rated countries,” the statement said.
Mentioning progress on policy reforms underpinned by the International Monetary Fund (IMF), the Moody’s said Bangladesh has made significant progress on structural reforms, guided by a three-year Extended Credit Facility (ECF) with the IMF, which commenced in 2012.
“These measures may turn into credit-positive developments if growth shifts to a higher trajectory, government debt affordability and fiscal flexibility improve and external liquidity strengthens further,” it noted.
About financial health of the state-owned commercial banks (SoCBs), the credit rating agency said the poor financial health of state-owned banks could result in the crystallisation of contingent liabilities that add to the fiscal burden.
However, given the small size of the banking system, the shrinking role of state-owned banks and improvements in central bank oversight and supervision, “we expect these risks to be limited.”
The Moody’s said the stable outlook reflects prospects for continuing economic stability despite recent electoral pressures. “Political turmoil and divisiveness, as seen in January 2014 ahead of parliamentary elections, have been a recurrent feature in Bangladesh.”
“Nevertheless, we expect ongoing tax and subsidy reforms to eventually strengthen the budget and to provide more fiscal space, enabling the government to expand capital expenditure,” it noted.
The Moody’s identified political disturbances that strain the country’s economic and fiscal profile as a negative factor that could trigger the rating action.
Other factors include the crystallisation of larger banking sector contingent liabilities than the Moody’s current anticipation which would weigh on fiscal strength; and a fundamental deterioration in the balance of payments.
On the other hand, the rating agency sees sustained, strong economic growth supported by structural improvements, particularly in infrastructure as positive factor that could trigger a positive rating action.
A broadening of the tax revenue base, which would improve fiscal fundamentals and flexibility and reform of the labour market and industrial working conditions, which would ensure continued favourable export prospects while encouraging greater foreign investment have been identified as positive factors for the rating.
Citibank N.A. worked as an adviser for the Moody’s rating. The Moody’s last revealed rating on Bangladesh was on April 25, 2013. Then also the country was rated ‘Ba3’ with a stable outlook.
BBN/SSR/AD-19Apr14-9:43 pm (BST)
