Moody's affirms Bangladesh's Ba3 rating; maintains stable outlook

Moody's Investors Service ("Moody's") has affirmed the Government of Bangladesh's Ba3 issuer and senior unsecured ratings and maintained the stable outlook on the ratings. Moody's has also affirmed Bangladesh's NP short-term issuer ratings.

Moody's released the information in a statement on April 17outlining the rationale for the decision.

Moody's decision to affirm the rating is driven by the following factors:

1. Strong growth, macroeconomic stability, and access to concessional funding;

2. A very narrow government revenue base that restricts fiscal flexibility
and very low institutional capacity that constrain the investment climate and competitiveness.

The maintenance of the stable outlook reflects the expectation that the balance of credit strengths and challenges described above is unlikely to shift over the outlook horizon.

COUNTRY CEILINGS

Bangladesh's Baa3 local currency bond and deposit ceilings remain
unchanged. The Ba2 country ceiling for foreign currency (FC) debt and B1 country ceiling for FC bank deposits also remain unchanged.

RATINGS RATIONALE

STRONG GROWTH, MACROECONOMIC STABILITY, AND FAVORABLE DEBT STRUCTURE

Bangladesh's Ba3 government bond rating is supported by the country's robust and stable growth performance, a core credit strength, and relatively low government debt burden.

Between FY2007 (fiscal year ending in June 2007) 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.

As a result, the size of Bangladesh's economy nearly tripled and real GDP per capita increased by over 80 percent during the same time period.

Private consumption is a key contributor to Bangladesh's economy, accounting for about 70 percent of total GDP. In addition, exports are an important driver of growth, led by the ready-made garments industry, which accounted for nearly 85 percent of total goods exports in US dollar terms in 2016.

Given Bangladesh's very low per-capita income level (PPP, US$3,398 in 2015) and abundant labor supply, garment exports have thrived based on the competitive advantage of low-cost labor.

"We expect 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 Bangladesh preserves its cost competitiveness and improves its attractiveness to foreign direct investment (FDI)," said Moody's.

Remittances from overseas Bangladeshi workers, which were around 6 percent of GDP in FY2016, also support growth through their impact on household income and consumption.

However, remittances have declined, as labor demand from the Gulf Cooperation Council (GCC) economies, the source of about 55 percent of all remittances, has eased. Moody's expects remittances flows to stabilize near current levels, and potentially pickup 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 remittances does persist, it would likely have a negative credit impact by dampening consumption and widening the current account deficit.

Bangladesh's robust growth has occurred within a framework of improving macroeconomic stability, as reflected in price, balance of payments and fiscal indicators.

Average CPI inflation falling 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 6.0 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.

Meanwhile, remittances accounted for about 30 percent of current account receipts in FY2015, more than offsetting the trade deficit. 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 FY 2017.

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 Ba-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 favorable 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.

Source: BSS