Inspirational rating despite pandemic
Even amid the corona virus pandemic, world famous Moody’s Investors Service (“Moody’s”) affirmed recently the Government of Bangladesh’s long-term issuer and senior unsecured ratings at Ba3 and maintained the stable outlook. The short-term favorable issuer ratings were also affirmed likewise.
The drivers behind the rating affirmation include Moody’s expectation that continued robust growth performance, notwithstanding a sharp global slowdown underway, will anchor macroeconomic and external stability. The stable outlook reflects balanced risks at the Ba3 rating level, with both upside and downside risks, mainly related to the government’s ongoing implementation of key economic and fiscal reforms. Most significantly, more effective execution of recently enacted fiscal reforms would expand Bangladesh’s revenue base and increase the government’s fiscal flexibility beyond Moody’s current expectations.
Moody’s expects the Bangladesh economy will continue to grow between 7-8% over the next few years, underpinned by its globally competitive ready-made garments (RMG) industry, supported by macroeconomic and external stability. Bangladesh’s RMG industry has more than doubled its market share of global apparel exports over the last decade, reaching 6% of global apparel exports in 2018, and Bangladesh is now the world’s second largest clothing exporter, behind China. The industry’s competitiveness stems from low labor costs, vertical integration, technological investment and environmentally sustainable processes. Moreover, Bangladesh’s proximity to Asia’s largest markets, with rapidly growing middle-class populations, will continue to support the industry’s performance.
Risks related to the global coronavirus outbreak are notable. RMG supply chains have been disrupted and demand from Bangladesh’s key markets in Europe and the US looks likely to be depressed. However, Moody’s expects the shock to be temporary, with supply chains and demand starting to recover later this year.
Robust growth potential anchors macroeconomic stability. In turn, policies are conducive to preserving stability. Moody’s also expects prudent and credible monetary and fiscal policies to anchor macroeconomic stability. Moderate reserve money growth — the central bank’s operational target — anchors credit growth and inflation expectations. Adherence to fiscal deficit limits of 5% of GDP also fosters moderate inflation and reduces growth volatility arising from pro-cyclical fiscal policy.
External vulnerability risks also remain low, even taking into account a likely slowdown in exports and potentially weaker remittances. External financing from multilateral and bilateral lenders for infrastructure projects supports Bangladesh’s external dynamics. Moody’s expects foreign exchange reserves in Bangladesh to remain adequate, enough to cover around 5-6 months of imports of goods and services and around 90% of the government’s gross external debt, which carries long tenors and has been contracted on concessional terms.
Bangladesh’s debt affordability is significantly weaker than among Ba-rated sovereigns; interest payments amounted to around 19% of government revenue in fiscal 2018, about double the Ba-median level. However, administrative reforms have begun to dampen demand for National Savings Certificates (NSCs) — social savings instruments that offer an interest rate premium over domestic instruments — which had previously raised overall financing costs for the government. Fiscal year-to-date borrowing from NSCs through December has totaled BDT 54 billion, a significant reduction from around BDT 250 billion in fiscal 2019. The outstanding stock of NSCs has also begun to decline, which will slowly feed through to improvements in debt affordability.
Moreover, good access to concessional loans from multilateral and bilateral sources mitigates fiscal risks further. The government aims to reduce constraints through its large infrastructure projects, which include two deep sea ports, the country’s first mass rapid transit network in Dhaka, a road-rail bridge, and power plants The stable outlook reflects balanced risks. Effective implementation of measures to expand Bangladesh’s narrow revenue base and attract foreign direct investment could raise government revenue beyond Moody’s current expectations and increase the government’s fiscal flexibility. Moreover, an acceleration in the execution of large infrastructure projects and greater investments in human capital and climate resiliency, beyond Moody’s current assessment, would support long-term economic competitiveness and resiliency.