New York, April 17, 2017 -- Moody's Investors Service ("Moody's") has today
affirmed the Government of Bangladesh's Ba3 issuer and senior unsecured
ratings and maintained the stable outlook on the ratings. Moody's
has also affirmed Bangladesh's NP short-term issuer ratings.
Moody's decision to affirm the rating is driven by the following
factors:
1. Strong growth, macroeconomic stability, and access
to concessional funding;
2. A very narrow government revenue base that restricts fiscal
flexibility and very low institutional capacity that constrain the investment
climate and competitiveness.
The maintenance of the stable outlook reflects the expectation that the
balance of credit strengths and challenges described above is unlikely
to shift over the outlook horizon.
COUNTRY CEILINGS
Bangladesh's Baa3 local currency bond and deposit ceilings remain
unchanged. The Ba2 country ceiling for foreign currency (FC) debt
and B1 country ceiling for FC bank deposits also remain unchanged.
RATINGS RATIONALE
STRONG GROWTH, MACROECONOMIC STABILITY, AND FAVORABLE DEBT
STRUCTURE
Bangladesh's Ba3 government bond rating is supported by the country's
robust and stable growth performance, a core credit strength,
and relatively low government debt burden. Between FY2007 (fiscal
year ending in June 2007) and FY2016, real GDP growth averaged 6.2%
year-on-year, which was significantly higher than
the median of 4.3% for Ba3-rated peers. As
a result, the size of Bangladesh's economy nearly tripled
and real GDP per capita increased by over 80% during the same time
period.
Private consumption is a key contributor to Bangladesh's economy,
accounting for about 70% of total GDP. In addition,
exports are an important driver of growth, led by the ready-made
garments industry, which accounted for nearly 85% of total
goods exports in US dollar terms in 2016. Given Bangladesh's
very low per-capita income level (PPP, US$3,398
in 2015) and abundant labor supply, garment exports have thrived
based on the competitive advantage of low-cost labor. We
expect Bangladesh's global apparel market share (currently about
6%) 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).
Remittances from overseas Bangladeshi workers, which were around
6% of GDP in FY2016, also support growth through their impact
on household income and consumption. However, remittances
have declined, as labor demand from the Gulf Cooperation Council
(GCC) economies, the source of about 55% of all remittances,
has eased. Moody's expects remittances flows to stabilize
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. 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.
Bangladesh's robust growth has occurred within a framework of improving
macroeconomic stability, as reflected in price, balance of
payments and fiscal indicators. Average CPI inflation falling from
10.26% in FY2011 to 5.51% in FY2016,
below the Bangladesh Bank's target ceiling of 5.8%.
Moody's expects price pressures to remain contained, with
inflation rising only marginally close to 6.0% by the end
of 2017.
On the external front, strong export growth has supported an increase
in foreign exchange reserves to about $31 billion in FY2017 from
about $8 billion in FY2011. Meanwhile, remittances
accounted for about 30% of current account receipts in FY2015,
more than offsetting the trade deficit. 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%
of GDP in FY 2017.
Fiscal deficits have averaged 3.3% of GDP over the past
five fiscal years and the debt-to-GDP ratio has declined
to 27.2% in FY2016 from 40.2% in FY2006.
Bangladesh's government debt ratios are significantly below the
median of 41.3% for Ba-rated peers. Multilateral
and bilateral funding, much of it concessional, accounts for
about 46% of general government debt and 80% of total external
debt. This favorable debt structure mitigates debt affordability
risks stemming from weak government revenues. Moody's expects
the general government debt burden to rise marginally to just below 30%
over the next two years, and to continue to be financed largely
by concessional borrowing.
LOW REVENUE BASE RESTRICTS FISCAL FLEXIBILITY WHILE VERY LOW INSTITUTIONAL
STRENGTH CONSTRAINS INVESTMENT CLIMATE AND COMPETITIVENESS
At approximately 10% of GDP in the FY 2016, Bangladesh's
government revenue ratio is one of the lowest among Moody's-rated
sovereigns. As a result, and despite recurrent underspending
on capital expenditure relative to budget plans, Bangladesh has
recorded continued fiscal deficits averaging about 3.3%
of GDP over the past 10 years. Bangladesh's weak revenue generation
and high cost of borrowing for the non-concessional portion of
its debt, results in weak debt affordability, with government
interest payments on debt equivalent to nearly 20% of revenues
per year. Moreover, the low revenue base constrains the government's
capacity to spend on physical and social infrastructure.
In July 2017, a new automated VAT system is scheduled to be implemented
that will harmonize tax rates and facilitate tax reporting and collection.
The government has indicated that reforms to the direct tax code and customs
regime would eventually follow. The successful implementation of
these reforms would go some way in addressing a key constraint on the
sovereign credit profile, although a material pick up in revenues
will likely lag policy implementation, and fiscal flexibility is
likely to remain limited over the next few years.
Bangladesh's weak revenue collection is also reflective of weak institutions
and competitiveness. The country ranks in the 15th percentile of
rated sovereigns for the World Bank Worldwide Governance Indicator scores
on government effectiveness, rule of law and control of corruption.
Meanwhile, it ranks 106th out of 138 countries in overall competitiveness,
according to the World Economic Forum Global Competitiveness Index,
with particularly weak sub-scores for institutions (125 of 138)
and infrastructure (114 or 138). The authorities aim to address
these issues by easing infrastructure gaps and improving the overall business
climate, supported by multilateral and bilateral financial and technical
assistance.
RATIONALE FOR MAINTAINING THE STABLE OUTLOOK
The stable outlook reflects a balance of positive and negative pressures.
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. However,
revenue and institutional capacity weakness will likely constrain the
rating over the outlook horizon.
WHAT COULD CHANGE THE RATING UP
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.
Additionally, 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.
WHAT COULD CHANGE THE RATING DOWN
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 crystallization of contingent liabilities from the banking system,
or a structural deterioration in the external position could pressure
the rating.
GDP per capita (PPP basis, US$): 3,398 (2015
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 7.1% (2016 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.5%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -3.1%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 1.7% (2016 Actual) (also
known as External Balance)
External Debt/GDP: 15.4 (2016 Estimate)
Level of economic development: Low level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 13 April 2017, a rating committee was called to discuss the rating
of the Bangladesh, Government of. The main points raised
during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutional strength/ framework, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
William Foster
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
