Moody's gives Bangladesh another good credit rating
Tuesday, 13 April 2010
FE Report
Moody's Investors Service has assigned Bangladesh Ba3 rating meaning macroeconomic fundamentals of the country is better and it has less chance to face severe stress on creditworthiness.
The rating is more or less similar to the rating of BB- assigned by Standard and Poors' a week earlier, said finance minister Abul Maal Abdul Muhith on Monday.
The country will be charged less for letter of credit confirmation and guarantee, which will ultimately reduce the cost of import, he said.
"Bangladesh's rank is above Pakistan but lower than India in the sub-continent," he added.
The rating, however, is the same as the Philippines and Vietnam.
Bangladesh Bank governor Dr Atiur Rahman said export of dynamic readymade garment sector coupled with robust remittance flow helped the country achieve the rating.
Procurement of minimum foreign commercial loan and extremely well debt servicing are the other reasons behind the good score, he said.
The challenges the rating agency mentioned are low revenue collection and concentrated industrial base, he added.
The agency assigns rating to about 130 countries around the world and considered as more conservative than S&P.
The rating broadly incorporate assessment of Bangladesh's reasonable degree of financial and balance-of-payments robustness which, coupled with prospects for continued macroeconomic stability, reduces the likelihood of severe stress on the country's creditworthiness, Moody's said in a statement.
"The combination of a conservative institutional framework for managing the economy, supported by capital controls, has ensured better external balance and price stability than at many other emerging markets at a similar stage of development," says Aninda Mitra, a Moody's vice-president and lead sovereign analyst for Bangladesh.
"Policy stability and underlying demographic shifts coupled with steady increases in trade openness have aided a remarkably steady rate of economic growth averaging 6 per cent over the past decade," he said adding, "The economy has also ably withstood several recent external shocks, periods of domestic political stress and supply-side bottlenecks."
Mitra attributes this resilience to the robust growth of remittance inflows and the growing role of microfinance institutions.
These have offset the vagaries of subsistence level per capita income by supporting domestic consumption and helping to develop a critical social safety net.
Despite its medium-size economy and evidence of recent economic dynamism, Bangladesh's relatively high industrial and export dependence on the ready-made garments (RMG) sector is a ratings constraint.
"However, in the medium term, a broader process of sustained industrial diversification, supply-side and financial sector reforms, and regional economic integration may help reduce infrastructure rigidities and alleviate concentration risks," notes Mitra.
Bangladesh's relatively robust external position and especially its strong foreign currency reserve adequacy, compares favourably with most other Ba and single-B-rated peers.
The government's debt dynamics are supported by the gradual strengthening of GDP growth rates, a stable-to-appreciating real effective exchange rate, and a readily financeable budget deficit, Mitra said.
"However, despite the generally positive trends in the government's debt trajectory, debt affordability and fiscal flexibility face more pressure than do most of its rating peers," he adds.
Bangladesh's low debt affordability is reflected by interest pressures in the budget that exceed most Ba- and B-rated sovereign credits.
The lack of fiscal flexibility is reflected in a high government debt-to-revenue ratio of 350 per cent, resulting, once again, from shortcomings in revenue generation.
Bangladesh's impending tax reforms in the forthcoming fiscal year are particularly important in supporting its credit outlook. "This will not only support improved fiscal flexibility and debt affordability, but the reforms will also underpin much-needed expansion of public development expenditure," said Mitra.
Additionally, Moody's has assigned Bangladesh long-term local currency bond and deposit ceilings of Baa3, reflecting the broader financial, political and legal country risks faced by locally funded or domiciled credit transactions.
The principal methodology that Moody's uses in rating the country is 'Moody's Sovereign Bond Ratings Methodology.'
"Both the rating agencies have given Bangladesh high score on its continued macroeconomic stability on the back of prudent macro-economic policy and microeconomic reforms," Alamgir Morshed, Director, Head of Global Markets of Standard Chartered Bank (SCB), Bangladesh, told the FE.
While S&P used the average of 4.2 per cent real capital gross domestic product (GDP) growth as the barometer, Moody's highlighted the 6 per cent average GDP growth as a major contributor to its positive rating, Mr. Alamgir added.
"The strong growth in the country's foreign exchange reserve has also been rated favourably. Prudent macro economic management and sound policies have been accredited for price stability as well as a stable exchange rate," the SCB senior official noted.
He said while the ratings were positive, the agencies pointed out certain constraints that are holding Bangladesh back from moving to a higher growth trajectory. They pointed to the high public and external debt, lack of fiscal flexibility due to poor revenue collection as well as capacity constraints in state institutions.
Mr. Alamgir also said debt roll-over risk is also contained by the government's cash balances in the banking system and the country's respectable savings rates that provide greater debt absorption capability compared with its peers.
"There is also less contingent fiscal pressures on the government because outstanding guarantees for non financial state-owned enterprise's (SOEs) are relatively low. The banking sector is not reliant on external funding and is not likely to pose any serious contingent sovereign risks," Mr. Alamgir added.
"Gains for Bangladesh are manifold. The rating will create confidence and provide access to capital for development. This is a vital international benchmark which should have favourable impact on foreign direct investment (FDI) and portfolio flows. Private sector business momentum will also be encouraged." Sajedul Islam, Director and Head of Citi Global Markets, Bangladesh, told the FE.
The ratings will be reviewed annually. Standard Chartered Bank and the Hong Kong and Shanghai Banking Corporation Limited, generally known as HSBC, were advisors to the Bangladesh government for S&P's rating, while Citibank N.A. advised for rating from Moody's.
Moody's Investors Service has assigned Bangladesh Ba3 rating meaning macroeconomic fundamentals of the country is better and it has less chance to face severe stress on creditworthiness.
The rating is more or less similar to the rating of BB- assigned by Standard and Poors' a week earlier, said finance minister Abul Maal Abdul Muhith on Monday.
The country will be charged less for letter of credit confirmation and guarantee, which will ultimately reduce the cost of import, he said.
"Bangladesh's rank is above Pakistan but lower than India in the sub-continent," he added.
The rating, however, is the same as the Philippines and Vietnam.
Bangladesh Bank governor Dr Atiur Rahman said export of dynamic readymade garment sector coupled with robust remittance flow helped the country achieve the rating.
Procurement of minimum foreign commercial loan and extremely well debt servicing are the other reasons behind the good score, he said.
The challenges the rating agency mentioned are low revenue collection and concentrated industrial base, he added.
The agency assigns rating to about 130 countries around the world and considered as more conservative than S&P.
The rating broadly incorporate assessment of Bangladesh's reasonable degree of financial and balance-of-payments robustness which, coupled with prospects for continued macroeconomic stability, reduces the likelihood of severe stress on the country's creditworthiness, Moody's said in a statement.
"The combination of a conservative institutional framework for managing the economy, supported by capital controls, has ensured better external balance and price stability than at many other emerging markets at a similar stage of development," says Aninda Mitra, a Moody's vice-president and lead sovereign analyst for Bangladesh.
"Policy stability and underlying demographic shifts coupled with steady increases in trade openness have aided a remarkably steady rate of economic growth averaging 6 per cent over the past decade," he said adding, "The economy has also ably withstood several recent external shocks, periods of domestic political stress and supply-side bottlenecks."
Mitra attributes this resilience to the robust growth of remittance inflows and the growing role of microfinance institutions.
These have offset the vagaries of subsistence level per capita income by supporting domestic consumption and helping to develop a critical social safety net.
Despite its medium-size economy and evidence of recent economic dynamism, Bangladesh's relatively high industrial and export dependence on the ready-made garments (RMG) sector is a ratings constraint.
"However, in the medium term, a broader process of sustained industrial diversification, supply-side and financial sector reforms, and regional economic integration may help reduce infrastructure rigidities and alleviate concentration risks," notes Mitra.
Bangladesh's relatively robust external position and especially its strong foreign currency reserve adequacy, compares favourably with most other Ba and single-B-rated peers.
The government's debt dynamics are supported by the gradual strengthening of GDP growth rates, a stable-to-appreciating real effective exchange rate, and a readily financeable budget deficit, Mitra said.
"However, despite the generally positive trends in the government's debt trajectory, debt affordability and fiscal flexibility face more pressure than do most of its rating peers," he adds.
Bangladesh's low debt affordability is reflected by interest pressures in the budget that exceed most Ba- and B-rated sovereign credits.
The lack of fiscal flexibility is reflected in a high government debt-to-revenue ratio of 350 per cent, resulting, once again, from shortcomings in revenue generation.
Bangladesh's impending tax reforms in the forthcoming fiscal year are particularly important in supporting its credit outlook. "This will not only support improved fiscal flexibility and debt affordability, but the reforms will also underpin much-needed expansion of public development expenditure," said Mitra.
Additionally, Moody's has assigned Bangladesh long-term local currency bond and deposit ceilings of Baa3, reflecting the broader financial, political and legal country risks faced by locally funded or domiciled credit transactions.
The principal methodology that Moody's uses in rating the country is 'Moody's Sovereign Bond Ratings Methodology.'
"Both the rating agencies have given Bangladesh high score on its continued macroeconomic stability on the back of prudent macro-economic policy and microeconomic reforms," Alamgir Morshed, Director, Head of Global Markets of Standard Chartered Bank (SCB), Bangladesh, told the FE.
While S&P used the average of 4.2 per cent real capital gross domestic product (GDP) growth as the barometer, Moody's highlighted the 6 per cent average GDP growth as a major contributor to its positive rating, Mr. Alamgir added.
"The strong growth in the country's foreign exchange reserve has also been rated favourably. Prudent macro economic management and sound policies have been accredited for price stability as well as a stable exchange rate," the SCB senior official noted.
He said while the ratings were positive, the agencies pointed out certain constraints that are holding Bangladesh back from moving to a higher growth trajectory. They pointed to the high public and external debt, lack of fiscal flexibility due to poor revenue collection as well as capacity constraints in state institutions.
Mr. Alamgir also said debt roll-over risk is also contained by the government's cash balances in the banking system and the country's respectable savings rates that provide greater debt absorption capability compared with its peers.
"There is also less contingent fiscal pressures on the government because outstanding guarantees for non financial state-owned enterprise's (SOEs) are relatively low. The banking sector is not reliant on external funding and is not likely to pose any serious contingent sovereign risks," Mr. Alamgir added.
"Gains for Bangladesh are manifold. The rating will create confidence and provide access to capital for development. This is a vital international benchmark which should have favourable impact on foreign direct investment (FDI) and portfolio flows. Private sector business momentum will also be encouraged." Sajedul Islam, Director and Head of Citi Global Markets, Bangladesh, told the FE.
The ratings will be reviewed annually. Standard Chartered Bank and the Hong Kong and Shanghai Banking Corporation Limited, generally known as HSBC, were advisors to the Bangladesh government for S&P's rating, while Citibank N.A. advised for rating from Moody's.