Dhaka, Bangladesh (BBN)- Global credit rating agency Moody’s Investors Service has identified three near-term risks – slower exports, sluggish foreign direct investment (FDI) and volatile foreign aid – for Bangladesh.
The Moody’s also said such risks to the external accounts may persist throughout the current fiscal year (FY) 2012-13.
It has suggested keeping the foreign exchange reserves at a sufficient level to cover maturing debt obligations as reflected in the low external vulnerability indicator (EVI), 29.9 per cent at the end of the FY `11.
The top rating agency predicts political sparring will increase ahead of elections, expecting that the ruling Awami League (AL) will complete its term.
“While the transition to the next elections could be noisy, we expect the AL to complete its term,” the US-based Moody’s said in its latest analysis, which was submitted to the government on Tuesday.
On the political front, the dynamics remain contentious between the incumbent AL and the main opposition Bangladesh Nationalist Party (BNP).
“Sparring between the two parties is currently centred on reinstatement of the caretaker government system to oversee parliamentary election due in 2014,” the US-based Moody’s analysis said.
Another development which stirred the ‘political waters’ was the sanctions taken against Grameen Bank Chairman Muhammad Yunus over the last two years, according to the analysis.
“The recent escalation in garment worker unrest also puts on the radar screen the stability of the labour market, which could in turn have negative implications on foreign aid and investment flows, as well as on export and economic growth,” it noted.
Regarding slower exports, the Moody’s said the exports are poorly diversified, both by product and region, largely weighted towards ready-made garments (RMG) heavily exposed to Europe.
“Labour unrest could also potentially disrupt production as workers demand higher wages and better working conditions,” the analysis said.
It also said net FDI inflow fluctuated between 0.5-1.3 per cent of the gross domestic product (GDP) over the past decade –lower than for its Ba-or B-rated peer medians.
“Lack of progress in infrastructure development and the land acquisition problem could further constrain foreign direct investment,” the Moody’s noted.
About volatility of foreign aid, the analysis said net foreign aid contracted significantly during the first half of the 2011-12 fiscal year before rebounding in the second half to end the year up by 18.8 per cent.
“The recent volatility in such flow is underscored by the recent withdrawal of US$1.2 billion project credit by the World Bank for construction of the Padma Multipurpose Bridge due to transparency issues,” the Moody’s said.
It also said financial soundness indicators of state-owned commercial banks remain considerably weaker than those of the private or foreign commercial banks.
Bangladesh’s susceptibility to event risk is low, the analysis said, adding that this reflects a largely stable banking system that poses manageable contingent risks to the government’s balance sheet, as well as the low likelihood that the country’s contentious politics would result in a sudden shift in the policy framework.
It also said Bangladesh government’s financial strength is assessed at low-to-moderate due to a weak revenue base and structural pressures from subsidies and quasi-fiscal expenditures.
However, these considerations are offset by a gradual and steady improvement in the debt burden, light internal and external debt payment requirements and ongoing efforts for revenue reforms, the Moody’s added.
It also said the country’s current account consistently posted surpluses since the FY `06, reflecting the continued strength of RMG exports and stable inflows from workers’ remittance.
The country’s low costs are a main driver for its export business, but have led to widespread and frequent unrest by workers demanding better pay and conditions. Most recently in mid-June this year, protests and violence by Bangladeshi garment workers led to a week-long closure of 300 factories.
BBN/SSR/AD-20Sept12-11:00 am (BST)
