Ratings agency Moody's has maintained a stable outlook for Bangladesh thanks to its robust economic growth, macro-economic stability and relatively low government debt levels.
The agency has reaffirmed a credit rating of Ba3 for government bonds, according to a posting on its website on Monday.
“The stable outlook reflects a balance of positive and negative pressures,” said Moody's Investors Service.
It said revenue and institutional capacity weaknesses will likely constrain the rating over the outlook horizon.
Moody's said the decision to affirm the rating is driven by strong growth, macroeconomic stability, and access to concessional funding, and a very narrow government revenue base that restricts fiscal flexibility and very low institutional capacity that constrains the investment climate and competitiveness.
“The maintenance of the stable outlook reflects the expectation that the balance of credit strengths and challenges is unlikely to shift over the outlook horizon.”
Between FY2007 and FY2016, real GDP growth averaged 6.2 percent year-on-year, which was significantly higher than the median of 4.3 percent for Ba3-rated peers.
Moody's expects Bangladesh's global apparel market share, currently about 6 percent, to rise as China continues to transition away from low-end manufacturing into higher-value goods, while the country preserves its cost competitiveness and improves its attractiveness to foreign direct investment.
It said remittance flows would stabilise near current levels, and potentially pick up 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 remittance does persist, it would likely have a negative credit impact by dampening consumption and widening the current account deficit.”
It said average inflation fell from 10.26 percent in FY2011 to 5.51 percent in FY2016, below the Bangladesh Bank's target ceiling of 5.8 percent. Moody's expects price pressures to remain contained, with inflation rising only marginally close to 6 percent 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.
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 percent of GDP in FY2017.
It said fiscal deficits have averaged 3.3 percent of GDP over the past five fiscal years and the debt-to-GDP ratio has declined to 27.2 percent in FY2016 from 40.2 percent in FY2006. Bangladesh's government debt ratios are significantly below the median of 41.3 percent for Ba3-rated peers.
Multilateral and bilateral funding, much of it concessional, accounts for about 46 percent of general government debt and 80 percent of total external debt. “This favourable 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 percent over the next two years, and to continue to be financed largely by concessional borrowing.