Projecting Bangladesh's outlook as 'stable' again for the current calendar year, the global credit rating agency Moody's has cautioned a negative credit impact if the ongoing falling trend in remittances continues.
Bangladesh is rated Ba3 with a stable outlook, according to the Moody's analysis released on Tuesday.
Bangladesh's Ba3 government bond rating is supported by its robust and stable growth performance, a core credit strength, and relatively low government debt burden, the US-based Moody's Investors Service said in its research.
"The stable outlook reflects a balance of positive and negative pressures," the credit rating agency explained.
While exposed to external risks through trade and remittances, Bangladesh is likely to maintain a relatively robust growth rate, macro-economic stability and relatively low government debt levels, it noted.
"However, revenue and institutional capacity weakness will likely constrain the rating over the outlook horizon," the Moody's observed.
The credit rating agency has rated Bangladesh's outlook as stable for eight consecutive years.
Remittances from overseas Bangladeshi workers, which were around 6.0 per cent of GDP (gross domestic product) in the fiscal year (FY) 2015-16, also support growth through their impact on household income and consumption, according to the Moody's research.
However, remittances have declined as labour demand from the Gulf Cooperation Council (GCC) economies, the source of about 55 per cent of all remittances, has eased.
The Moody's expects remittance flow to stabilise near current levels, and potentially pickup in line with future increases in global oil prices.
An increase in Bangladeshi overseas worker emigration in 2016 should provide some support to inflows later this year, it added.
"Nonetheless, if the current trend of falling remittances does persist, it would likely have a negative credit impact by dampening consumption and widening the current account deficit," the Moody's predicted.
The Moody's latest observations came against the backdrop of a declining trend in the flow of inward remittances in recent months due to sluggish economic activities in the GCC countries coupled with a rising trend in sending money by expatriate Bangladeshis through informal channels.
The overall remittance inflow has dropped by nearly 17 per cent or US$ 1.86 billion in the first nine months of the FY 17, against the same period of the previous fiscal.
The remittance receipts came down to $ 9.19 billion during the July-March period this FY, from $ 11.06 billion in the same period of the previous fiscal, according to the official figures.
The inflow was estimated at $ 1.08 billion in March 2017, up by $ 136.69 million from that of the previous month. In February 2017, the amount stood at $ 940.75 million. It was $ 1.28 billion in March 2016.
Private consumption is a key contributor to the Bangladesh's economy, accounting for about 70 per cent of total GDP.
Besides, export is an important driver of growth, led by ready-made garments industry, which accounted for nearly 85 per cent of total goods exports in terms of US dollar in 2016.
Given Bangladesh's very low per-capita income level (PPP, US$ 3,398 in 2015) and abundant labour supply, garment exports have thrived based on competitive advantage of low-cost labour.
"We expect Bangladesh's global apparel market share (currently about 6.0 per cent) to rise as China continues to transition away from low-end manufacturing into higher-value goods, while Bangladesh preserves its cost competitiveness and improves its attractiveness to foreign direct investment (FDI)," the Moody's said in the research.
On the external front, strong export growth has supported an increase in foreign exchange reserves to about $ 31 billion in the FY 17 from about $ 8 billion in the FY 11.
Meanwhile, remittances accounted for about 30 per cent of current account receipts in the FY 15, more than offsetting the trade deficit.
The Moody's expects the recent decline in remittances, along with a rise in import demand, to result in a very small current account deficit of about 0.2 per cent of GDP in the FY 17.
Fiscal deficits have averaged 3.3 per cent of GDP over the past five fiscal years and the debt-to-GDP ratio has declined to 27.2 per cent in the FY 16 from 40.2 per cent in the FY 06.
Bangladesh's government debt ratios are significantly below the median of 41.3 per cent for Ba-rated peers, according to the research.
Multilateral and bilateral funding, much of it concessional, accounts for about 46 per cent of general government debt and 80 per cent of total external debt.
"This favourable debt structure mitigates debt affordability risks stemming from weak government revenues," it noted.
Moody's also expects the general government debt burden to rise marginally to just below 30 per cent over the next two years, and to continue to be financed largely by concessional borrowing.
About the rating down, the Moody's said downward pressure would emerge if institutional or political setbacks, such as prolonged and disruptive large-scale protests or more frequent terrorist attacks, strained the economic or fiscal profile.
"The crystallisation of contingent liabilities from the banking system, or a structural deterioration in the external position could pressure the rating," it noted.
On the other hand, triggers for a rating upgrade could stem from improvements in the fiscal and operating environment.
In particular, fiscal reforms that contribute to increased government revenue generation and improved debt affordability would put positive pressure on the rating.
Besides, material progress in developing critical transportation and power infrastructure, combined with meaningful improvements to the investment climate, could further raise growth potential with positive credit implications, according to the research.
siddique.islam@gmail.com
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