Fitch, one of the three most important credit rating agencies in the world, has identified political uncertainty and the underlying vulnerability in the banking sector, especially the state banks, as big risks to the Bangladesh economy.
“This most recent episode in Bangladesh's political history highlights prolonged high political risk levels. Continued political polarisation and uncertainty may impact economic activity through long-term investment decisions,” Fitch said in its latest review of Bangladesh.
Political tensions and violence that marked the run-up to the parliamentary elections in January had a “moderately negative impact” on economic growth but “did not paralyse the economy”.
Fitch assigned the country long-term credit rating of BB- and short-term rating of B and a country ceiling of BB-.
“Bangladesh's ratings reflect a balance between high, stable real GDP growth and strong external balances, and weak structural features indicating significant political and banking sector risk.”
Fitch said the banking sector is vulnerable to shocks, especially the state-owned banks, as both asset quality and governance are weak.
The gross non-performing loans ratio of the sector increased to 10.5 percent in the first quarter of the year but that of state-owned banks stood at 21.9 percent.
“Bangladesh Bank seems committed to strengthen the poor governance in the banking sector, but has indicated it would need more extensive powers,” the rating agency said.
The state banks will need additional capital in the medium-term, which would imply crystallisation of contingent liabilities for the sovereign, it said.
Bangladesh's ratings are constrained by a low level of development. The country scores poorly on a broad range of governance indicators and ranks low on the United Nations' human development indicators, with a GDP per capita of $1,023 in 2013, well below the 'BB' peer category median of $4,696, the agency said.
Both the general government debt (40 percent of GDP) and fiscal deficit (5 percent of GDP) compare unfavourably with the 'BB' category medians of 35 percent and 2.7 percent respectively, Fitch said.
A “disappointing” government revenue intake has led to a higher fiscal deficit of 5.0 percent of GDP than the targeted 4.6 percent.
The budget for fiscal 2014-15 aims to keep the fiscal deficit at 5 percent of GDP, suggesting that no fiscal consolidation efforts can be expected of this government anytime soon, it said.
Fitch said the country is on track with regards to the International Monetary Fund's Extended Credit Facility programme, with the government meeting several structural benchmarks, including those related to the implementation of a new VAT law, establishment of internal controls and compliance and full automation of financial reporting in the state banks.
“Inclusion of strong fiscal performance criteria in a potential follow-up programme could result in the build-up of a credible fiscal consolidation track record.”