Bangkok--8 Apr--Standard & Poor's
--We consider Bangladesh free from major macroeconomic imbalances despite severe fiscal constraints, a low-income economy, and heavy development needs.
--We assigned our 'BB-' long-term foreign and local currency sovereign credit ratings to the People's Republic of Bangladesh.
--The stable outlook reflects our expectations that prudent macroeconomic policy-setting will prevail and microeconomic reforms to address growth constraints will continue.
Standard & Poor's Ratings Services today said that it had assigned its 'BB-' long-term and 'B' short-term foreign and local currency sovereign credit ratings on the People's Republic of Bangladesh. The outlook is stable. With Bangladesh, Standard & Poor's now rates 124 sovereign governments.
At the same time, Standard & Poor's assigned Bangladesh a transfer and convertibility (T&C) assessment of 'BB-'. A T&C assessment reflects our view of the likelihood of the sovereign restricting nonsovereign access to foreign exchange needed to satisfy the nonsovereign's debt service obligations. For Bangladesh, Standard & Poor's views this risk as being similar to its sovereign default risk because strict official controls over capital outflows have been in force throughout the country's history and, in our view, the government seems likely to retain them in the medium term.
The ratings on Bangladesh take into account what we consider to be the country's relatively high public and external debt, the government's limited fiscal flexibility owing to low revenue generation, and the country's low income level along with related physical and human capital development challenges. These factors are balanced by strong economic growth amid fiscal and monetary stability, steadily improving central bank reserve coverage, and the broad underlying support of external donors.
"We believe that Bangladesh's economy is largely free of macroeconomic imbalances in spite of its low income level, relatively narrow economic profile, and significant fiscal constraints," said Standard & Poor's sovereign credit analyst Agost Benard. In our view, policy continuity and generally sound macroeconomic management have supported relatively strong growth, with per capita GDP rising an average of 4.2% annually in the past decade.
Bangladesh's resilient garment export sector and a high and rising remittance flow both play a crucial role in supporting increasingly strong external liquidity, in our opinion, and these sectors have evolved over time as two key engines of economic growth. Garment exports and remittances combined account for about 80% of current account receipts and 25% of GDP. Notably, both remittances and garment exports continued to expand during the 2008-2009 global economic recession. We expect these trends to continue to help foreign reserves to reach five months of current account payments this year.
In our view, these strengths, combined with significant ongoing donor support, balance the vulnerabilities posed by the sovereign's relatively high public and external debt, significant fiscal constraints, and the low income levels.
Net general government debt, while less than its peak of 52% of GDP in 2001, remains well above the median for this rating category at a projected 40% of GDP in 2010. External debt, at a projected 70% of current account receipts, is similarly high, although this is mitigated by the concessional nature for most of the public sector component and a weighted average maturity of 22 years.
Against this, Bangladesh's tax-to-GDP ratio, at 8.5%, and total revenue to GDP of 11.8% are among the lowest in the universe of sovereigns rated by Standard & Poor's, due to a combination of low tax compliance, administrative weaknesses, an agricultural sector that is largely free from taxation and, more broadly, the prevalence of tax exemptions and holidays.
"The relatively large public debt and low revenue base for servicing it is highlighted by a debt-to-revenue ratio estimated at 360%, which is nearly three times the median level for the BB rating category," said Mr. Benard.
In our opinion, comprehensive revenue reforms that yield a durable rise in revenue generation would be needed to reduce the vulnerability of debt service burden and reliance on external donor support, and to finance higher public investment. Public investment grew by just 2.9% annually on average in the past decade, compared with nominal GDP growth of 13.2% annually. Hence, economic performance is increasingly constrained by the lack of adequate infrastructure, in particular for energy provision, and moving onto a higher growth path, in our view, would likely require more substantial public investment to reduce such bottlenecks.
The stable rating outlook reflects our expectations that a prudent macroeconomic policy-setting will prevail and microeconomic reforms to gradually address growth constraints will continue. The ratings could improve if the Bangladesh government implements measures to expand the low revenue base and improve administrative and collection efficiency, leading to a material rise in its revenue. The ratings could also be raised if rising investment leads to a sustainable increase in trend real GDP growth. Conversely, the ratings could be lowered if fiscal slippages push the trajectory of government debt upward and if external donor support declines materially.
RELATED CRITERIA AND RESEARCH
"Sovereign Credit Ratings: A Primer," published May 29, 2008.
Complete ratings information is available to RatingsDirect on the Global Credit Portal subscribers at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
Media Contact:
David Wargin, New York (1) 212.438.1579,
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Analyst Contacts:
Agost Benard, Singapore (65) 6239-6347
David T Beers, London (44) 20-7176-7101
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