Fitch affirms Bangladesh’s issuer default rating at ‘BB-’, outlook stable

The rating agency Fitch Ratings on Thursday affirmed Bangladesh's Long-Term Foreign-Currency Issuer Default Rating (IDR) at "BB–" with a stable outlook.

The rating reflects Bangladesh's strong growth prospects, government debt that is below the "BB" median, and a manageable external debt repayment profile.

This is balanced by low government revenue, low per capita income, a weak banking sector, and deficient governance indicators, Fitch said in a statement.

The stable outlook reflects the move to greater exchange-rate flexibility.

Also, the prospect of continued support from external official creditors will help Bangladesh navigate a challenging external environment posed by the Ukraine war and rising global interest rates.

While the growth prospects of Bangladesh's economy are strong, its economic activity is expected to slow to 5% in the current fiscal 2022-23, given the temporary measures to contain imports and curb electricity consumption.

However, growth should pick up to 6.4% in 2024 as these measures are eased along with a fall in commodity prices. The recovery from the Covid-19 pandemic has continued, with Gross Domestic Product (GDP) expanding by 7.3% in FY22.

Growth has been broad-based; supported by private consumption with the aid of remittances, government spending, investment, and a surge in ready-made garment exports of 35% Year-on-Year (YoY) basis, it added.

Referring to the external interface of the economy, Fitch said the pressure on the country's international reserves has reduced.

Its foreign-exchange reserves fell by 16% to $38.9 billion in eight months of 2022 amid surging imports and foreign-currency intervention by the central bank.

But, the pressure on reserves should ease following policy measures to curb imports, a hike in administered fuel prices of nearly 50%, and greater exchange-rate flexibility.

Fitch said the current-account deficit is expected to narrow to 3% of GDP in 2023 and 2.3% in 2024, from 4% in 2022. The foreign exchange reserves will average at $34 billion, or 4.7 months of current external payments, in 2023-2024.

There are, however, downside risks to our forecasts from a renewed surge in global fuel and food costs stemming from the Russia-Ukraine war.

The forex reserve buffer is adequate relative to external financing needs, including external debt repayments, but limited transparency in reserve management could increase uncertainty and hurt the credibility of the policy framework.

The actual level of available liquid FX reserves could be lower than gross figures suggest since a portion is allocated to the Export Development Fund and Bangladesh Investment Development Fund, it added.

Low government revenue

The general government revenue/GDP ratio, at 9.8% in FY22, is a key credit weakness and much below the 27.3% 'BB' median, Fitch said.

It added that the already low revenue base could be further undermined by measures contained in the FY23 budget, including a corporate tax cut without offsetting measures. The budget targets a deficit of 5.5% of GDP.

The deficit could undershoot the government's target, as has occurred in the past, but our FY23 economic growth forecast trails the government's 7.5%, meaning that the budget deficit is likely to slightly exceed the government's target.

Weak banking-sector governance

Fitch said they regard the health of Bangladesh's banking sector and governance standards as weak, especially among public-sector banks.

Official data reveals that the system's gross non-performing loan (NPL) ratio reached 8.5% by the end March 2022, from 7.9% at end-2021, it mentioned, adding that the NPL ratio of state-owned commercial banks, at 20.0%, is substantially higher than the 5.8% of private-sector banks, but the ratios could rise further once forbearance measures are withdrawn.

Bank capitalisation is thin relative to prevailing market risks and we believe the banking sector could be a source of contingent liability for the sovereign if credit stress intensifies.

The system's capital adequacy ratio (CAR) stood at 11.4% as of March 2022, against 11.08% at end-2021, while the CAR of state-owned banks was 6.8%, up from 3.7%, Fitch said.