Dhaka, Bangladesh (BBN)- The global credit rating agency Moody’s Investors Service has rated Bangladesh’s outlook as stable for the fourth consecutive year with reference to financial and political risks.

The US-based agency said Bangladesh’s Ba3 rating and the stable outlook reflect the Moody’s assessment of four factors: ‘low’ economic, institutional and government’s financial strength as well as “low” susceptibility to risks from financial, economic and political events.

The outlook for Bangladesh is ‘Ba3’ with stable foreign and local currency bond ratings, according to the Moody’s latest analysis, released on Thursday.

Bangladesh’s rating is higher than Sri Lanka (‘B1’) and Pakistan (‘Caa1’), but one notch below India.

Bangladesh’s strong and stable growth supports its rating, the Moody’s said, adding that macroeconomic stability was regained in 2012 with the current account reverting to surplus and the decline in inflation.

However, persistent labour disruptions and bank stability pose risks, the Moody’s said in a statement.

The rating also incorporates economic, financial and institutional weaknesses of the government, it said.

The fiscal imbalances constrained the government’s financial strength, mainly because of its extremely low revenue-GDP (gross domestic product) ratio of 13 per cent resulting not from a policy of low taxation, but from a low tax base and poor compliance, it added.

“Bangladesh’s governance weaknesses became more apparent in the past year, as seen in the World Bank’s suspending funding for the Padma Bridge Project in June 2012 and a state-owned bank’s (Sonali) misappropriation of funds a few months later,” it noted.

The US-based Moody’s also said the incident involving Sonali Bank highlighted the weak governance structure of state-owned banks (SOBs) and prompted the government to significantly tighten the regulatory framework to prevent recurrence of such incidents.

Moreover, escalating political tensions in the run-up to parliamentary elections — due between October 2013 and January 2014 — are a deterrent to investment and are disruptive to economic growth, according to the Moody’s.

Although political strife is unlikely to spiral out of control, the Moody’s would view any prolonged unrest as ‘credit negative’.

“Bangladesh’s’ Ba3 sovereign rating is mainly supported by the strong and stable growth. Government’s financial performance is mostly in line with that of its rating peers and progress has been made recently on fiscal reforms,” the credit analysis said.

The Balance of Payment (BoP) pressure has eased since last year and inflation has stabilised, the analysis said.

The low-to-moderate financial strength reflects a manageable external financing position and a debt service burden, it noted.

“Official access to concessional external financing limits the exchange rate and sovereign debt rollover risks,” it also noted.

The International Monetary Fund’s (IMF) Extended Credit Facility (ECF) approved in March 2012 is supporting prudent policies. The government has passed two major pieces of legislation the Bank Companies Act (BCA), which aims to enhance the mandate of Bangladesh Bank, the country’s central bank, and the landmark revisions to the Value Added Tax (VAT) law, it said.

In the fiscal year (FY) 2011-12, pressure on the BoP, coupled with an uptick in inflation and a slowing global environment, resulted in growth slowing to 6.3 per cent year on year, from 6.7 per cent in the previous year, it said.

“Although we expect growth to slow further to 5.9 per cent in FY 2013, this has been accompanied by improved macroeconomic stability,” the Moody’s said.

It also said a combination of proactive central bank measures, the IMF’s approval of the US$ 958 million ECF in March 2012, and lower global oil prices eased pressure on the BoP.

The current account reverted to a small surplus, while inflation slowed to 7.7 per cent in March 2013 from a high of 12 per cent in September 2011, according to the Moody’s analysis.

At the same time, remittance inflows continued to be strong, growing by 16.6 per cent during the first three quarters of FY 2013, and supporting private consumption, it noted.

The Moody’s said the political scenario in Bangladesh is strongly polarised between the ruling Awami League (AL), led by Sheikh Hasina, and the main opposition, Bangladesh Nationalist Party (BNP), led by Khaleda Zia.

“A strong anti-incumbency sentiment has resulted in government alternating between the two parties,” the analysis said.

Similar to previous election cycles, tensions already began escalating in the run-up to the next parliamentary elections. “It will likely be a closely contested battle.”

But the political situation this time around has been further complicated by two key issues-the lack of a neutral caretaker government to oversee elections and the judgment meted out by a war crimes tribunal, it mentioned.

“These primary issues have been manifested in the frequent occurrence of strikes, or ‘hartals’. Apart from undermining Bangladesh’s democratic institutions and distracting the government from effective policymaking, strikes also send a negative signal to foreign investors, which is reflected in Bangladesh’s low ratio of foreign direct investment to GDP,” it mentioned further.

The Moody’s, however, said the risk of any destabilising event stemming from the strikes appeared remote, for now.

“A strong entrepreneurial class, which is most impacted by such disruptions, is likely to lobby for political consensus; and increasing international involvement from other stakeholders/investors could also play a role in limiting political tensions. Nonetheless, we would view prolonged unrest as credit negative,” the Moody’s noted.

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.

Citibank N.A. worked as an adviser for the Moody’s rating. The Moody’s last revealed ratings on Bangladesh on September 18, 2012. Then also the country was rated ‘Ba3’ with a stable outlook.

BBN/SSR/AD-27Apr13-2:19 pm (BST)