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
