Global rating agency Standard and Poor’s yesterday maintained its long-held BB- rating for Bangladesh, in what can be viewed as a setback of sorts given how the country has become the toast of the development world for its tremendous growth momentum.
Bangladesh is forecasted to be amongst the top three fastest growing nations in the world this year and the next by all leading multilateral institutions.
“We are affirming our ‘BB-’ long-term and ‘B’ short-term sovereign credit ratings on Bangladesh,” said the American credit ratings agency yesterday.
The stable outlook reflects S&P’s expectation that Bangladesh’s solid growth path will continue to raise average income and prevail over risks to external metrics over the next 12 months.
However, Bangladesh faces the vulnerabilities of a low-middle-income economy, fiscal constraints and heavy development needs.
The BB- rating reflects the country’s low economic development and limited fiscal flexibility owing to a combination of constrained revenue-generation capacity, high debt-servicing costs and heavy spending to improve its basic infrastructure and government services.
The administrative and institutional weaknesses represent additional rating constraints.
“Bangladesh’s political landscape constrains the effectiveness of institutions and impedes sound policymaking.”
However, the economy continues to sustain high, steady economic growth supported by a competitive garment sector.
Given a weak institutional setting, infrastructure deficiencies and difficult business environment, Bangladesh’s foreign direct investment has remained persistently low.
Low economic development, as represented by per capita GDP of around $1,900 for 2019, has been one of Bangladesh’s main rating constraints, it said.
This income level offers a weak and narrow revenue base, in turn limiting the fiscal and monetary flexibility needed to respond to exogenous shocks.
Despite the low-income level and numerous structural impediments, particularly in infrastructure, Bangladesh’s real per capita GDP growth of about 5.9 percent over 2013-2022 indicates consistently strong real economic growth.
Garment exports and worker remittances are key anchors of Bangladesh’s strong external position but face risks from global factors and maturing of construction boom in host countries.
The country’s fiscal flexibility is constrained by a large interest burden from the issuance of high-yield national savings certificates.
However, many basic social and infrastructure needs remain unmet, implying higher outlays ahead for which the fiscal capacity of the government is lacking.
Although the government’s debt burden is low, its high interest expense at 20 percent of revenue limits fiscal flexibility.
Due to the government’s increasing reliance on the costlier national savings schemes rather than commercial borrowing, S&P expects the debt-servicing ratio to remain well above 15 percent for fiscals 2019-2022.
Furthermore, more than 40 percent of total government debt is denominated in foreign currency, albeit mostly from official concessional donors.
The American ratings agency went on to forecast that the net general government debt will average 4.2 percent of GDP annually over fiscals 2019-2022.
“We assess a limited risk related to contingent liabilities from financial institutions. The banking sector remains small with assets less than 100 percent of GDP, which informs our view of the contingent risk it poses.”
Bangladesh’s exports have gained momentum, which narrowed the deficit in the first half of fiscal 2018-19.
“We expect the trend of export recovery to continue.”
The agency expects remittances to recede and stabilise once the construction boom in host countries for Bangladeshi workers mature over fiscal 2019-2020.
This implies that the gap between the country’s external debt and its liquid external assets is unlikely to reduce.
S&P may raise the ratings if the government implements fiscal measures that strengthen future fiscal performances, or lower it if fiscal or external metrics weaken materially from current levels.
This could happen if persistent fiscal slippages cause net general government debt to overshoot 30 percent of GDP.