Bangkok--18 Apr--Moody's Investor
Moody's Investor Service says tax reforms andinfrastructure enhancement efforts are supporting Bangladesh's Ba3rating. The rating outlook is stable.An updated analysis of the rating is provided in Moody's 2011 annualsovereign report .
RATIONALE FOR THE RATING:
1. Bangladesh's economy is treading the path to a higher growth potential, but is also facing modest near-term risks. With declining poverty, improved food security, favorable demographics, and recentefforts to enhance infrastructure, conditions for higher growth arevisible. However, a recent deceleration of remittance inflows, and arising trade imbalance are resulting in modest near-term pressures in theexternal balance of payments.
2. The policy framework is reasonably effective, but deeper reforms willsustain higher growth targets. Ongoing tax and budgetary reforms andreasonably effective monetary management can absorb the modest sizednear-term balance of payments pressures. However, amidst Bangladesh's
rising energy intensity and pent up demand for capital goods, landreforms and improvements in governance are important. These could attractgreater foreign direct investment which would be useful in countering thepossible materialization of sustained external pressures.
3. Despite the recent external headwinds, Bangladesh's overall externalfinancing position is comfortable and its government debt service,manageable. Meanwhile, government debt burden and its affordability aregradually improving. These credit features benefit from access toofficial and low cost external finance. The government's very low revenuebase remains a key drawback, but tax reforms are being undertaken.
4. Economic and banking event risks are low, and polarized politics donot threaten the policy framework. Macro-financial stability, lowexternal indebtedness, and improving banking fundamentals are key supportfactors. Excessive government interventions in the stock market or instate enterprises may raise contingent fiscal pressures somewhat. But,these are expected to remain within the liquid resources of the broaderpublic sector.
RATIONALE FOR THE OUTLOOK:
The rating outlook is stable. Given the prospects for steadily risinggrowth in a very low-income economy, the outlook balances an expectedmoderation in the external balance of payments from a rather comfortableposition, against improving tax collection from very low levels.
WHAT COULD CHANGE THE RATING -- UP:
Bangladesh's rating could move up if sustained increases in economicgrowth were to be supported by infrastructure improvements, enhancedregional integration and a broadening of the tax revenue base. Thesedevelopments could support improvements in government debt affordability
and overall fiscal flexibility; and also encourage greater foreigninvestment which could fortify the reasonably healthy external paymentsposition.
WHAT COULD CHANGE THE RATING -- DOWN:
The rating would face downward pressure if a major shock to confidence,perhaps emanating from political or fiscal setbacks, or a deteriorationof the balance of payments resulted in a substantial reversal of gainsin the external payment position or adversely altered the improving trends in government and external debt trajectories.
PREVIOUS RATING ACTION & METHODOLOGY:
Moody's last rating action on Bangladesh was on April 12, 2010, at whichtime the local and foreign currency issuer ratings were assigned a Ba3,with a stable outlook.The principal methodology used in this rating was Moody's Sovereign BondMethodology published in September 2008.
The report is entitled "Credit Analysis: Bangladesh." It can be accessed at www.moodys.com.