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Dhaka, Bangladesh (BBN)- Top global rating agency Standard & Poor's (S&P) has affirmed its 'BB-' long-term and 'B' short-term sovereign credit ratings on Bangladesh with a stable outlook for the consecutive eight year.
The stable outlook balances the country's healthy growth prospects and an improving external profile against fiscal weaknesses and development needs, according to the S&P research update, released on Friday.
Sovereign credit rating is a strong tool for positioning Bangladesh in the global financial arena by providing relevant information and related indicators about its overall economic situation, experts said.
“Although we assess Bangladesh's external debt as low, the country faces the vulnerabilities of a low-income economy, fiscal constraints, and heavy development needs,” the S&P noted.
The rating agency also see moderate risk of contingent liabilities from financial institutions, in particular the state-owned commercial banks (SoCBs) sector.
Although the private sector banks are in adequate shape, significant risks reside in the SoCBs, according to the rating agency.
The SoCBs account for 28 per cent of total banking sector assets and non-performing loans (NPLs) had reached 25 per cent of its total loans as of end 2016.
“Although the government has begun to recapitalize some of the SoCBs, we expect the sector to remain below prudential norms and will continue to require budgetary support,” the rating agency observed.
It also said the central bank's limited independence, multiple mandates, and underdeveloped capital markets hamper monetary flexibility.
After the cyber heist of US$100 million in foreign reserves from Bangladesh Bank last year, the Ministry of Finance has since asserted more control over the central bank, the rating agency explained.
“The central bank has made progress in managing inflationary expectations. In the past two years, inflationary pressure subsided with reduced government borrowing from the banking sector,” the S&P added.
Inflation has stayed in the single digits since 2011.
About exchange rate, the rating agency said the Bangladeshi Taka exchange rate has remained fairly stable in the past two to three years.
“However, Bangladesh's real effective exchange rate has been rising, reflecting the currency depreciation of its trading partners. Should this persist, it could strain the competiveness of its export garment sector,” the S&P explained.
The rating agency envisages remittance inflows to remain subdued over the next one to two years, but a drastic collapse is not within its base-case scenario.
On the fiscal front, Bangladesh tends to run moderate deficits, according to the agency.
It forecasts the change in general government debt will average 2.8 per cent of GDP annually over fiscal 2017-2020 (end June 30).
However, many basic social and infrastructure needs remain unmet, implying the need for higher outlays ahead.
“Although the government's debt burden is low, with net general government debt at our projection of 22 per cent of GDP as of the end of fiscal 2017, its high interest expense at 17.4 per cent of revenues limits fiscal flexibility,” the S&P noted.
It also said the government's increasing use of a costlier national savings certificates scheme rather than commercial borrowings infers that its debt-servicing ratio will not necessarily fall even if there is fiscal consolidation.
Despite numerous structural impediments to growth, in particular the shortage of electricity, the economy has a record of steady growth, according to the rating agency.
“Should these impediments be addressed, we believe Bangladesh's growth trajectory would be stronger than peers'. That said, the high dividend payouts in comparison to foreign direct investments suggest little earnings are retained due to the difficult business operating environment,” it explained.
It also said Bangladesh's narrow revenue base limits the government's flexibility to mitigate the effect of economic downturns or other shocks.
Bangladesh has only 2.0 million registered taxpayers (out of a population of 155 million), according to the S&P.
The rating agency also said general government revenue was 10 per cent of GDP (gross domestic product) in fiscal 2016, among the lowest of rated sovereigns globally.
“Numerous initiatives are underway to expand the tax base, most notably the plan to reform the complicated Value Added Tax (VAT) system,” the S&P noted.
The government has set a target to standardise the VAT rate at 15 per cent by July 2017.
However, the plan has been repeatedly delayed over the past years since it was first passed into law in 2012.
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