High score for Bangladesh

A migrant worker departs from Hazrat Shahjalal International Airport in Dhaka. A continued inflow of worker remittance from abroad underpins economic growth. Photo: SK Enamul Haq

Moody's Investors Service, a US-based credit rating agency, announced for the first time its sovereign credit rating for Bangladesh as 'Ba3' just after a week of S&P's sovereign credit rating announcement of 'BB-' on April 6. This is for the first time the country obtained sovereign credit ratings from the two internationally reputed credit rating agencies.
Moody's sovereign credit rating of Ba3 with a stable outlook is in line with S&P's sovereign rating of BB-/stable announced earlier. The sovereign credit ratings will give an assessment of the government's ability and willingness to repay its local and foreign currency debts. Both quantitative and qualitative factors have been considered in deriving the sovereign ratings.
In the global financial arena, the BB- and Ba3 sovereign credit ratings put Bangladesh at a position higher than Pakistan and Sri Lanka and in the same category of countries such as Vietnam, Philippines, Indonesia and Turkey. Bangladesh has also been categorised by Goldman Sachs as one of the Next 11 fast growing emerging countries after Brazil, Russia, India and China, which are referred to as BRIC countries.
Both rating agencies pointed to Bangladesh's continued macroeconomic stability on the back of prudent macroeconomic policy setting and microeconomic reforms. Both agencies highlighted strong and stable economic growth over the past decade. While S&P used the average of 4.2 percent real capital GDP growth as the barometer, Moody's highlighted the 6 percent average GDP growth as a major contributor to its positive rating.
They have also stressed the resilience of the Bangladesh economy to external shocks as well as domestic stress as positive indicators. A strong and resilient RMG sector and the continued inflow of workers remittances from abroad, also underpinned economic growth. The strong growth in the country's foreign exchange reserve has also been rated favourably. Prudent macroeconomic management and sound policies have been accredited for price stability as well as a stable exchange rate.
S&P further pointed out the positive impacts of substantial donor engagement that helped improve policy formulation and eased some of the burden of providing education and health services on the government.
Moody's remarked that the conservative institutional frameworks, which are supported by capital controls, have ensured better external balance and price stability. Also, the growing role of micro-financial institutions has helped to supplement domestic consumption and develop a critical social safety net.
Debt rollover risk is also contained by the government's cash balances in the banking system and the country's respectable savings rate that provides greater debt absorption capability compared with its peers. There is also less contingent fiscal pressure on the government because outstanding guarantees for non-financial state-owned enterprises are relatively low. The banking sector is not reliant on external funding and is not likely to pose any serious contingent sovereign risks.
While the ratings were positive, the rating agencies pointed out certain constraints that are holding Bangladesh back from moving to a higher growth trajectory. They pointed to the high public and external debt, lack of fiscal flexibility due to poor revenue collection as well as capacity constraints in state institutions.
S&P noted that the debt burden is mitigated by the fact that external debt service cost is about 3 percent of exports, mostly on concessional terms and has a weighted average maturity of 22 years. They also pointed to the constraints imposed on the economy due to the energy and infrastructural deficiency, the difficult operating environment and perennially low foreign direct investment.
Moody's also highlighted the need for export diversification and over-reliance on the RMG sector, ideological politics, banking system weakness and government's ability/dependence on borrowing from the local debt market where the cost is high.
The ratings will be reviewed annually. Standard Chartered Bank and HSBC were advisers to the government for S&P's rating, while Citibank NA advised for rating from Moody's.
The writer is the head of global markets at Standard Chartered Bank, Bangladesh