Singapore, October 10, 2018 -- Moody's Investors Service ("Moody's") has today
affirmed the Government of Bangladesh's long-term issuer
and senior unsecured debt ratings at Ba3 and maintained the stable outlook.
The short-term issuer ratings are affirmed at Not-Prime.
The key drivers of the rating affirmation are:
1. Robust growth and policy that are conducive to macroeconomic
stability;
2. Low debt affordability owing to the government's weak
revenue generation capacity, balanced by a low debt burden and fiscal
discipline; and
3. Infrastructure, human capital and institutional constraints
that weigh on economic competitiveness and limit economic diversification.
The decision to maintain the stable outlook reflects Moody's expectation
that risks to the ratings are balanced. On the upside, effective
implementation of measures to expand the tax net and attract foreign direct
investment could raise government revenue beyond Moody's expectations
and aid economic diversification. On the downside, a sharp
increase in risk premia, which could result in sharp local currency
depreciation that raise inflation and interest rates, and/or a continued
increase in government borrowing through National Savings Certificates
(NSCs) would weigh on debt affordability.
Bangladesh's Baa3 local currency bond and deposit ceilings remain unchanged.
The Ba2 foreign currency bond ceiling and the B1 foreign currency deposit
ceiling are also unchanged. The short-term foreign currency
bond and deposit ceilings remain unchanged at Not-Prime.
These ceilings act as a cap on the ratings that can be assigned to the
obligations of other entities domiciled in the country.
RATINGS RATIONALE
RATIONALE FOR THE RATING AFFIRMATION
ROBUST GROWTH AND POLICY CONDUCIVE TO STABILITY
Moody's expects Bangladesh to continue achieving high growth rates
of around 7.0-7.5% over the next few years,
supported by its globally competitive ready-made garments (RMG)
industry. Strong growth and policies conducive to macroeconomic
stability support the sovereign's rating.
The RMG industry has gained global market share over the past decade to
account for more than 6% of global apparel exports in 2017 from
less than 3% in 2007, and Bangladesh is now the second largest
exporter after China. The industry's global competitiveness
stems from a variety of factors ranging from low labour costs to vertical
integration and investment in technology and environmentally sustainable
processes, which help raise efficiency and meet evolving consumer
demand.
Prudent and credible monetary and fiscal policies further underpin macroeconomic
stability. In particular, moderate reserve money growth --
the central bank's operational target -- anchors credit growth
and inflation expectations. Adherence to fiscal deficit limits
of 5% of GDP also fosters moderate inflation and reduces growth
volatility arising from pro-cyclical fiscal policy. Policy
effectiveness has been demonstrated by the stability in economic growth
over the past decade, low growth and inflation volatility,
and the absence of boom-bust credit cycles.
External vulnerability risks also remain low despite Moody's expectations
for slightly wider current account deficits to persist, driven mainly
by fuel prices and higher infrastructure-related imports --
in part related to the government's large infrastructure projects.
Moody's expects the current account deficit to remain around 2-3%
of GDP over the next few years, after widening to an estimated 3.5%
of GDP in fiscal 2018 (the year ending in June 2018). The ongoing
rebound in remittances will lend some support to the current account balance,
while external financing from multilateral and bilateral lenders for the
infrastructure projects supports the broader balance of payments dynamics.
Moody's expects foreign exchange reserves in Bangladesh to remain
adequate, sufficient to cover around 5-6 months of imports
and more than 90% of the government's gross external debt,
which is largely long dated and on concessional terms.
WEAK REVENUE GENERATION CAPACITY LIMITS FISCAL SPACE, BALANCED BY
FISCAL DISCIPLINE PRESERVING A LOW DEBT BURDEN
Balanced against the broad macroeconomic stability is the government's
very low revenue generation capacity. At 11.7% of
GDP in fiscal 2018, the government's revenue base is one of
the lowest in Moody's rated universe. Persistently low government
revenue adds to relatively high financing costs to weigh on debt affordability
and constrain the government's fiscal space, particularly
in light of infrastructure and social spending needs. These credit
constraints are balanced by fiscal discipline that support the low government
debt burden.
The authorities are implementing a number of measures to raise revenue
by widening the tax base and improving tax compliance. Measures
include the digitisation of value added taxes (VAT) and the electronic
filing of income taxes; organising week-long annual tax fairs
to increase tax registration and return filing; and enforcing severe
penalties on tax evaders.
Moody's baseline assumptions include some, albeit not all,
of the revenue increase planned by the government. Given Bangladesh's
track record, revenue shortfalls are likely to persist. In
general, delays in the implementation of revenue-raising
measures reflect the political, and in some cases technical,
complexity of meeting the government's targets. For instance,
the VAT law that is currently targeted by the government for implementation
in fiscal 2020 now seems likely to be passed but after it has been deferred
for four years.
Besides a narrow revenue base, Bangladesh's debt affordability
is weakened by a relatively high cost of government debt. Increased
issuance of National Savings Certificates (NSCs) -- social savings
instruments that currently offer an interest rate premium over domestic
treasury bills and bonds -- has raised the government's overall
financing costs. The share of general government debt financed
from the higher yielding NSCs increased significantly to 34% in
fiscal 2018 from 25% in fiscal 2016. The authorities plan
to introduce reforms to the NSCs in the upcoming medium-term debt
management strategy, due in December 2018, by tightening eligibility
requirements and improving the monitoring of limits.
Bangladesh's low government debt burden offsets these fiscal constraints.
Moody's expects the general government debt to GDP ratio to remain
around 30-32%, anchored by the country's strong
nominal GDP growth and the government's track record in meeting
its deficit targets.
INFRASTRUCTURE, HUMAN CAPITAL AND INSTITUTIONAL CONSTRAINTS CONTINUE
TO WEIGH ON ECONOMIC COMPETITIVENESS AND LIMIT ECONOMIC DIVERSIFICATION
Notwithstanding stability-conducive macroeconomic policies,
Bangladesh continues to face challenges in government effectiveness,
control of corruption, and weak credibility in its legal structures.
Institutional weaknesses limit efficacy in long-term measures to
improve the quality of infrastructure and human capital.
Inadequate physical infrastructure continue to constrain Bangladesh's
manufacturing and export capacity and limit diversification prospects.
Road traffic is congested, rail routes are limited, and there
is only one major port in Chittagong servicing exports. The government
aims to reduce infrastructure constraints through its large infrastructure
projects, which include two deep sea ports, the country's
first mass rapid transit network in Dhaka, a road-rail bridge,
and power plants, all due to be completed between 2019 and 2023.
While additional and newer infrastructure may relieve some of the constraints
on the economy, demand for infrastructure is growing at a fast pace.
It is likely that such demand will only be partially met, with the
economic returns materialising over a long period of time.
A further constraint to economic competitiveness in general and to the
development of adequate infrastructure in particular is persistent weaknesses
in corporate governance and lengthy judicial and bankruptcy processes
that raise operational risks in the country and deter foreign investment.
These institutional constraints have resulted in weak asset quality and
capital adequacy in the state-owned banks.
Meanwhile, human capital constraints also weigh on global economic
competitiveness and limit opportunities for the country to move up the
value-added chain. Enrolment rates in secondary education
and beyond are low relative to peers. Despite abundant labour supply,
Bangladesh's economy continues to face a shortage of skilled managers
and specialists. Moody's does not expect significant improvements
in the quality of human capital.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects balanced risks to the ratings.
On the upside, effective implementation of the new VAT law and measures
to expand the tax net and attract foreign direct investment could raise
government revenue and economic growth beyond Moody's expectations
and aid economic diversification.
On the downside, although external financing needs are low and provided
for by multilateral and bilateral development partners, a sharp
increase in risk premia could result in sharp local currency depreciation,
which would raise inflation and interest rates, and weigh on debt
affordability. Continued increase in government borrowing through
NSCs would also raise interest expense and weaken debt affordability further.
Meanwhile, persistent financial weakness in state-owned banks
could compromise the implementation of essential infrastructure projects.
WHAT COULD CHANGE THE RATING UP
The stable outlook indicates that a rating change is unlikely in the near
future.
Over time, the rating would likely be upgraded in the event of (1)
improvements in the fiscal environment, including a significant
increase in the government's revenue generation capacity and lower
cost of financing, that would increase debt affordability and the
fiscal space; and/or (2) material progress in developing critical
physical infrastructure and institutional and economic reforms that would
raise economic competitiveness, income levels and the economy's
shock absorption capacity.
WHAT COULD CHANGE THE RATING DOWN
Conversely, the rating would likely be downgraded if (1) the debt
burden increased sharply, possibly through large borrowing to fund
infrastructure projects that do not provide commensurate economic returns;
(2) the banking sector's financial health weakened, particularly
for state-owned banks, with rising contingent liability risks
to the government; and/or (3) political tensions increased and undermined
macroeconomic policy stability.
GDP per capita (PPP basis, US$): 4,784 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 7.3% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.9%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -3.4%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.6% (2017 Actual)
(also known as External Balance)
External debt/GDP: 18.1% (2017 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
SUMMARY OF MINUTES FROM RATING COMMITTEE
On 08 October 2018, 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 materially increased.
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.
Christian Fang
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
