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S&P reaffirms stable outlook on Bangladesh

May 31, 2019 00:00:00

Standard & Poor's, a global credit rating company, has reaffirmed a stable outlook on Bangladesh, thanks to solid growth path against fiscal constraints, and heavy development needs, reports bdnews24.com.

The US-based financial services company assigned "BB-" long-term and "B" short-term sovereign credit ratings on the country.

"The stable outlook reflects our expectation that Bangladesh's solid growth path will continue raising average income and prevail over risks to external metrics over the next 12 months," it said.

Bangladesh received the same rating and outlook from S&P since it first rated the country in 2010.

"The ratings on Bangladesh reflect the country's low economic development and limited fiscal flexibility owing to a combination of constrained revenue-generation capacity, high debt-servicing costs, and heavy spending to improve its basic infrastructure and government services," S&P said.

It identified that the country's administrative and institutional weaknesses that represent additional rating constraints.

"We weigh these factors against a sound external position, reflecting support from substantial donor engagement, large remittances by Bangladesh citizens outside back to the country, and a globally competitive garment sector."

Bangladesh faces the vulnerabilities of a low-middle-income economy, fiscal constraints, and heavy development needs, but benefits from low external debt and resilient economic growth, it warns.

The ratings may be raised if the government implements fiscal measures that strengthen future fiscal performances.

"This could happen if persistent fiscal slippages cause net general government debt to rise to, and is sustained at, levels above 30 per cent of GDP. We may also lower the ratings if the external profile worsens materially, possibly due to significantly weakened export demand."

On the political front, one of the rating agencies in the world, S&P said Bangladesh's political landscape constrains the effectiveness of institutions and impedes sound policymaking.

However, the economy continues to sustain high, steady economic growth supported by a competitive garment sector, it said.

"Bangladesh's domestic political conditions distract from stable policymaking and generally hampers policy implementation. The confrontational stance between the incumbent Awami League and opposition Bangladesh Nationalist Party harbours the potential for conflict."

The agency stated that given a weak institutional setting, infrastructure deficiencies, and difficult business environment, Bangladesh's foreign direct investment has remained persistently low.

S&P said the low economic development, as represented by per capita GDP of $1,900 for 2019, has been one of Bangladesh's main rating constraints. "This income level offers a weak and narrow revenue base, in turn limiting the fiscal and monetary flexibility needed to respond to exogenous shocks."

Despite the low income level and numerous structural impediments, particularly in infrastructure, S&P said, Bangladesh's real per capita GDP growth of about 5.9 per cent over 2013-2022 indicates consistently strong real economic growth.

On revenue and interest, it commented that Bangladesh's narrow revenue base and high interest costs reflect structural weaknesses in its fiscal profile.

"Garment exports and worker remittances are key anchors of Bangladesh's strong external position but face risks from global factors and maturing of construction boom in host countries," said the agency.

Bangladesh tends to run moderate fiscal deficits, it said forecasting the change in net general government debt will average 4.2 per cent of GDP annually over fiscal 2019-2022.

Although the government's debt burden is low, its high interest expense at 20 per cent of revenue limits fiscal flexibility.

The rating agency projects net general government debt at 25 per cent of GDP as of the end of the fiscal year on June 30, 2019.

Referring to the government's increasing use of a costlier national savings certificates scheme rather than commercial borrowings, it predicts the country's debt-servicing ratio to remain well above 15 per cent for 2019-2022.

On new VAT law expected to be introduced in the coming fiscal year, it said, "The government has outlined numerous initiatives to expand the tax base, most notably the plan to reform the complicated VAT system. We do not expect significant revenue increases from the new initiatives."

About the banking sector, the S&P said, "We assess a limited risk related to contingent liabilities from financial institutions. The banking sector remains small with assets less than 100 per cent of GDP, which informs our view of the contingent risk it poses."

It classified Bangladesh's banking sector in group '9' under its Banking Industry Credit Risk Assessment (with '1' being the highest assessment and '10' being the lowest).

Although the private sector banks are in better shape, significant risks reside in state-owned commercial banks, it said. Bangladesh's low external borrowings will remain key credit-supporting factors, noted the agency.

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