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Rating Action:

Moody's affirms Bangladesh's Ba3 rating, maintains stable outlook

19 Mar 2020

Singapore, March 19, 2020 -- Moody's Investors Service ("Moody's") has today affirmed the Government of Bangladesh's long-term issuer and senior unsecured ratings at Ba3 and maintained the stable outlook. The short-term issuer ratings are also affirmed at Not Prime.

The drivers behind the rating affirmation include Moody's expectation that continued robust growth performance, notwithstanding a sharp global slowdown underway, will anchor macroeconomic and external stability. Nonetheless, weak revenue generation capacity continues to constrain improvements in debt affordability and limits Bangladesh's fiscal flexibility, even as reliance on concessional borrowing lowers debt refinancing risks. The rating affirmation also considers challenges in addressing infrastructure needs and low levels of human capital, both of which constrain greater foreign investment and limit prospects for economic diversification over the medium to longer term.

The stable outlook reflects balanced risks at the Ba3 rating level, with both upside and downside risks, mainly related to the government's ongoing implementation of key economic and fiscal reforms. Most significantly, more effective execution of recently enacted fiscal reforms would expand Bangladesh's revenue base and increase the government's fiscal flexibility beyond Moody's current expectations. Conversely, weaker implementation of measures to expand Bangladesh's narrow revenue base would increasingly constrain the government's fiscal flexibility.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. For Bangladesh, the main exposure is reliance on exports to Europe and the US, which are likely to slow sharply, although at this stage to a highly uncertain extent. Today's action reflects the impact on Bangladesh's credit profile of a deep but temporary slowdown in global growth.

The local-currency bond and deposit ceilings are unchanged at Baa3. The foreign-currency bond ceiling is unchanged at Ba2 and the foreign-currency deposit ceiling is unchanged at B1. In addition, the short-term foreign-currency bond and deposit ceilings are "Not Prime.''

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE Ba3 RATING

ROBUST GROWTH PERFORMANCE ANCHORS AND IS SUPPORTED BY MACROECONOMIC STABILITY

Moody's expects the Bangladesh economy will continue to grow between 7-8% over the next few years, underpinned by its globally competitive ready-made garments (RMG) industry, supporting and supported by macroeconomic and external stability.

Bangladesh's RMG industry has more than doubled its market share of global apparel exports over the last decade, reaching 6% of global apparel exports in 2018, and Bangladesh is now the world's second largest clothing exporter, behind China. The industry's competitiveness stems from low labor costs, vertical integration, technological investment and environmentally sustainable processes. Moreover, Bangladesh's proximity to Asia's largest markets, with rapidly growing middle-class populations, will continue to support the industry's performance.

Risks related to the global coronavirus outbreak are notable. RMG supply chains have been disrupted and demand from Bangladesh's key markets in Europe and the US looks likely to be depressed. However, Moody's expects the shock to be temporary, with supply chains and demand starting to recover later this year.

Robust growth potential anchors macroeconomic stability. In turn, policies are conducive to preserving stability. Moody's also expects prudent and credible monetary and fiscal policies to anchor macroeconomic stability. 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.

External vulnerability risks also remain low, even taking into account a likely slowdown in exports and potentially weaker remittances. External financing from multilateral and bilateral lenders for infrastructure projects supports Bangladesh's external dynamics. Moody's expects foreign exchange reserves in Bangladesh to remain adequate, enough to cover around 5-6 months of imports of goods and services and around 90% of the government's gross external debt, which carries long tenors and has been contracted on concessional terms.

WEAK REVENUE GENERATION CONSTRAINS FISCAL FLEXIBILITY, WHILE CONCESSIONAL BORROWING MITIGATES DEBT FINANCING RISKS

Despite a strong track record of macroeconomic and external stability, the government's shallow revenue base limits fiscal flexibility. At approximately 12.6% of GDP as of fiscal 2019 (end June 2019), government revenue is one of the lowest among sovereigns globally. Persistently low government revenue and high domestic financing costs weigh on debt affordability and constrain the government's fiscal space, particularly considering infrastructure and social spending needs. These constraints are balanced by strong fiscal discipline and a largely concessional external debt burden.

Since enactment of the value-added tax (VAT) law in June 2019, performance has been weak, given administrative issues leading to significant leakages and little improvements in compliance. While the tax authorities are working on amendments to the law to improve revenue collections, Moody's expects administrative issues and organizational constraints to limit immediate gains resulting in no positive impact to government revenue from the VAT law in fiscal 2020. Further delays in revenue improvements could result from further legislative changes, as well as administrative or technological issues.

Bangladesh's debt affordability is significantly weaker than among Ba-rated sovereigns; interest payments amounted to around 19% of government revenue in fiscal 2018, about double the Ba-median level. However, administrative reforms have begun to dampen demand for National Savings Certificates (NSCs) -- social savings instruments that offer an interest rate premium over domestic instruments -- which had previously raised overall financing costs for the government. Fiscal year-to-date borrowing from NSCs through December has totaled BDT 54 billion, a significant reduction from around BDT 250 billion in fiscal 2019. The outstanding stock of NSCs has also begun to decline, which will slowly feed through to improvements in debt affordability.

Bangladesh's low government debt burden mitigates these fiscal constraints. Moody's expects the government's debt burden to remain around 35-37% of GDP over the coming years, anchored by strong nominal GDP growth and fiscal discipline. Moreover, access to concessional loans from multilateral and bilateral sources, which account for around 40% of Bangladesh's general government debt and more than 90% of government external debt, mitigates fiscal risks further.

INFRASTRUCTURE, HUMAN CAPITAL AND INSTITUTIONAL CONSTRAINTS WEIGH ON ECONOMIC COMPETITIVENESS, LIMIT ECONOMIC DIVERSIFICATION

Bangladesh continues to face challenges related to institutions and governance, particularly in areas of legislative policy effectiveness, control of corruption, and weak credibility and effectiveness of its judiciary system. Such institutional weaknesses limit efficacy in enacting structural reforms measures that would improve the quality of infrastructure and human capital, thereby raising economic competitiveness and diversification. Moreover, weak physical infrastructure continues to constrain Bangladesh's manufacturing and export capacity, also limiting industrial diversification into higher value-added industries.

The government aims to reduce 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. However, the significant costs associated with major infrastructure upgrades and repeated delays in project execution mean that the projects materialize until the mid-2020s, failing to keep pace with growing demand.

Persistent weaknesses in corporate governance and lengthy judicial and bankruptcy processes also raise operational risks in the country and deter foreign investment. This is particularly evidenced in weak asset quality and capital adequacy for state-owned banks, and the increasing use of regulatory forbearance.

Human capital constraints also weigh on economic competitiveness and limit diversification prospects into higher value-added industries. Enrollment rates in secondary education and beyond are low relative to both rating and regional peers. Despite abundant working-age population growth leading to an abundant labor supply, Bangladesh's economy continues to face a skilled labor shortages.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects balanced risks. Effective implementation of measures to expand Bangladesh's narrow revenue base and attract foreign direct investment could raise government revenue beyond Moody's current expectations and increase the government's fiscal flexibility. Moreover, an acceleration in the execution of large infrastructure projects and greater investments in human capital and climate resiliency, beyond Moody's current assessment, would support long-term economic competitiveness and resiliency.

Conversely, weaker implementation of measures to expand Bangladesh's narrow revenue base and complementary economic and fiscal reforms would increasingly constrain the government's fiscal flexibility and limit the ability to increase development spending. Additionally, any sharp increase in risk premia, which would result in sharp local currency depreciation that raises inflation and interest rates, would weigh on the government's already weak debt affordability.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are material to Bangladesh's rating. As a low-lying country with a large sea coast, Bangladesh is highly prone to flooding, which disrupts economic activity and raises social costs. Low incomes and infrastructure quality compound the impact of weather-related events on the sovereign. In addition, the magnitude and dispersion of seasonal monsoon rainfall also influence agricultural sector growth, generating some volatility and raising uncertainty about rural incomes and consumption.

Social considerations are material in Bangladesh's economic strength. Low incomes stem in part from physical and social infrastructure constraints that will take time to address. That said, per capita incomes have grown strongly over the past decade and poverty rates have declined sharply, thanks to high and stable economic growth.

Governance considerations are material to Bangladesh's rating. The country's Worldwide Governance Indicator scores point to weaknesses in control of corruption and rule of law, while the credibility of legal structures is also limited. These governance challenges have in part contributed to asset quality issues in the banking sector.

FACTORS THAT COULD LEAD TO AN UPGRADE

Upward pressure on the rating would likely emanate from a durable and material improvement in Bangladesh's fiscal environment beyond Moody's current expectations, likely emanating from improvements in the government's revenue generation capacity and a lower cost of financing, both of which would improve debt affordability and afford the government greater fiscal flexibility.

Moody's would also consider upgrading the rating should there be materially greater progress in developing critical physical infrastructure and enacting institutional and economic reforms that would raise economic competitiveness and diversification and increase the economy's shock absorption capacity to a greater degree than Moody's currently expects.

FACTORS THAT COULD LEAD TO A DOWNGRADE

Downward pressure on the rating would emerge should there be a marked deterioration in the government's fiscal position, occurring potentially through large borrowing to fund infrastructure projects that do not provide commensurate economic returns, an erosion in the government's revenue base, or a sharp increase in financing costs -- all of which would significantly restrict fiscal flexibility.

Moody's would also likely downgrade the rating should there be a material weakening in the health of the financial sector, particularly among state-owned banks, raising contingent liability risks, or if signs that a period of greater financial stress would adversely affect macroeconomic and external conditions.

Moody's would also consider downgrading the rating upon a renewed increase in political tensions that materially undermined macroeconomic stability.

GDP per capita (PPP basis, US$): 4,630 (2018 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 7.9% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 5.5% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -4.6% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -3.5% (2018 Actual) (also known as External Balance)

External debt/GDP: 20.0 (2018 Actual)

Economic resiliency: ba2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 16 March 2020, 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 materially decreased. The issuer's institutions and governance strength, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019. 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, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Michael Higgins
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

No Related Data.
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