Sovereign ratings and thereafter
Wednesday, 21 April 2010
Syed Jamaluddin
THE potential of Bangladesh as a reliable destination for international creditors and investors was positively assessed by the international credit rating agency, Standard and Poor's (S &P). This rating takes into account macroeconomic fundamentals, strong external liquidity, supported by resilience in apparel exports and remittance as well as external donor funding and an improving foreign exchange reserve. Bangladesh's positive outlook was also reaffirmed by Moody's, another international rating agency. Since the agencies that have done the rating are prestigious institutions of global standing, it can be said that their evaluations have put Bangladesh in a new focus among the international business community.
Bangladesh's scorecard with a BB- from S&P and Ba3 from Moody has placed it above Sri Lanka and Pakistan, though below India. This is a great achievement so far as the rating reflects our economic status and prospect, in spite of the constraints on its infrastructure and energy fronts. Now, how does Bangladesh stand to gain from such rating by international agencies?
This rating will help dispel any misgiving that the international investors and creditors might have had about the country's real potential as a business partner and an investment destination. They will now be able to take decisions on the updates available from the data base of Moody and S&P. There will be no need for guessing.
Bangladesh itself will now know its actual position as compared to other economies. It will be able to concentrate on addressing the weak spots in its economic map and chart out appropriate measures to deal with its international partners. Sovereign rating would help rationalise the premium charged by official agencies, export credit agencies and foreign lenders.
Though ratings have termed the economy's outlook stable, the rating agencies have not failed to point to fiscal constraints, low-income status and huge development needs that still burden the economy. The durability of assessment of the economy will depend on how prudently macroeconomic policies are framed and maintained and how macroeconomic reforms address the growth constraints.
Bangladesh's impending tax reforms in the next fiscal year are particularly important in supporting its credit outlook. This will not only support improved fiscal flexibility and debt affordability, but reforms will also underpin much needed expansion of public development expenditure.
The business community, especially bankers, have been enthused by the positive rating of the economy. They felt that rating will create confidence and provide access to capital for development. Global investors regard sovereign rating as a vital international benchmark when considering direct and portfolio investment in a country's private sector. Investors now have a clearer understanding about investment risk in Bangladesh.
While the ratings were positive, the rating 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. They also pointed to the constraints imposed on the economy due to the energy and infrastructural deficiency, the difficult operating environment and low foreign direct investment.
The rating agencies have highlighted the need for export diversification and reducing over-reliance on garment export. They have also referred to ideological politics, banking system weakness and government's dependence on borrowing from local market where the cost is high.
Energy crisis is holding back all progress in Bangladesh at the moment. The Asian Development Bank (ADB) has lowered the estimate of growth rate for Bangladesh. The Bangladesh chapter of International Chamber of Commerce organised a conference in Dhaka on April 13 last to deliberate on the power crisis. In the conference the businessmen urged the government to devise a fast track approach to facilitate their way to participate along with the government in the fight against nagging power crisis. They said that investment in power generation and hydrocarbon exploration should be taken up on a war footing and the private sector should be encouraged to take part in the process in a realistic manner.
The conference suggested open-pit mining of coal, taking into account the socio-economic context. Possible resistance against open pit mining should be handled pro-actively. An authority could be set up to deal with the rehabilitation of the affected people.
The government has organised several roadshows to attract foreign investment in the power sector and it should continue to woo the foreign investors for easing the power crisis. But we are not aware of the outcome of those roadshows.
The adviser to the Prime Minister on power sector said that the government would provide the initial funds to the private entrepreneurs for energy projects and they could raise the rest of the fund from non-resident Bangladeshis. According to him, formulation of coal policy and extraction of natural resources are major challenges for the government.
As chief guest at the conference, the Finance Minister said that the problems were complex. There are problems with power generation, pricing, exploration and transmission. In the last one year, the government approved projects with an estimated cost of $1.0 billion in power sector but it takes time to materialise. He advised the people to be patient as the crisis cannot be resolved overnight. People have waited for 15 months. They think that the government may fix a time-limit for elimination of load shedding. This will set all speculations at rest. This is not asking too much from the government.
(The writer is an economist and columnist. He can be reached at e-mail: svedjamaluddin22@yahoo.com)
THE potential of Bangladesh as a reliable destination for international creditors and investors was positively assessed by the international credit rating agency, Standard and Poor's (S &P). This rating takes into account macroeconomic fundamentals, strong external liquidity, supported by resilience in apparel exports and remittance as well as external donor funding and an improving foreign exchange reserve. Bangladesh's positive outlook was also reaffirmed by Moody's, another international rating agency. Since the agencies that have done the rating are prestigious institutions of global standing, it can be said that their evaluations have put Bangladesh in a new focus among the international business community.
Bangladesh's scorecard with a BB- from S&P and Ba3 from Moody has placed it above Sri Lanka and Pakistan, though below India. This is a great achievement so far as the rating reflects our economic status and prospect, in spite of the constraints on its infrastructure and energy fronts. Now, how does Bangladesh stand to gain from such rating by international agencies?
This rating will help dispel any misgiving that the international investors and creditors might have had about the country's real potential as a business partner and an investment destination. They will now be able to take decisions on the updates available from the data base of Moody and S&P. There will be no need for guessing.
Bangladesh itself will now know its actual position as compared to other economies. It will be able to concentrate on addressing the weak spots in its economic map and chart out appropriate measures to deal with its international partners. Sovereign rating would help rationalise the premium charged by official agencies, export credit agencies and foreign lenders.
Though ratings have termed the economy's outlook stable, the rating agencies have not failed to point to fiscal constraints, low-income status and huge development needs that still burden the economy. The durability of assessment of the economy will depend on how prudently macroeconomic policies are framed and maintained and how macroeconomic reforms address the growth constraints.
Bangladesh's impending tax reforms in the next fiscal year are particularly important in supporting its credit outlook. This will not only support improved fiscal flexibility and debt affordability, but reforms will also underpin much needed expansion of public development expenditure.
The business community, especially bankers, have been enthused by the positive rating of the economy. They felt that rating will create confidence and provide access to capital for development. Global investors regard sovereign rating as a vital international benchmark when considering direct and portfolio investment in a country's private sector. Investors now have a clearer understanding about investment risk in Bangladesh.
While the ratings were positive, the rating 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. They also pointed to the constraints imposed on the economy due to the energy and infrastructural deficiency, the difficult operating environment and low foreign direct investment.
The rating agencies have highlighted the need for export diversification and reducing over-reliance on garment export. They have also referred to ideological politics, banking system weakness and government's dependence on borrowing from local market where the cost is high.
Energy crisis is holding back all progress in Bangladesh at the moment. The Asian Development Bank (ADB) has lowered the estimate of growth rate for Bangladesh. The Bangladesh chapter of International Chamber of Commerce organised a conference in Dhaka on April 13 last to deliberate on the power crisis. In the conference the businessmen urged the government to devise a fast track approach to facilitate their way to participate along with the government in the fight against nagging power crisis. They said that investment in power generation and hydrocarbon exploration should be taken up on a war footing and the private sector should be encouraged to take part in the process in a realistic manner.
The conference suggested open-pit mining of coal, taking into account the socio-economic context. Possible resistance against open pit mining should be handled pro-actively. An authority could be set up to deal with the rehabilitation of the affected people.
The government has organised several roadshows to attract foreign investment in the power sector and it should continue to woo the foreign investors for easing the power crisis. But we are not aware of the outcome of those roadshows.
The adviser to the Prime Minister on power sector said that the government would provide the initial funds to the private entrepreneurs for energy projects and they could raise the rest of the fund from non-resident Bangladeshis. According to him, formulation of coal policy and extraction of natural resources are major challenges for the government.
As chief guest at the conference, the Finance Minister said that the problems were complex. There are problems with power generation, pricing, exploration and transmission. In the last one year, the government approved projects with an estimated cost of $1.0 billion in power sector but it takes time to materialise. He advised the people to be patient as the crisis cannot be resolved overnight. People have waited for 15 months. They think that the government may fix a time-limit for elimination of load shedding. This will set all speculations at rest. This is not asking too much from the government.
(The writer is an economist and columnist. He can be reached at e-mail: svedjamaluddin22@yahoo.com)