Little letup soon in forex pressures

Bangladesh's foreign-exchange reserves will stay on under pressures driven by rising import costs and foreign-currency intervention by the central bank, says Fitch Ratings amid already-persisting crunch.

"We forecast foreign-exchange reserves to stay under pressure, driven by rising imports and foreign-currency (FX) intervention by the central bank (of Bangladesh)."

The global credit-ratings agency has noticed gross reserves having fallen by 19 per cent in 9M23 to USD27.3 billion, or USD21.5 billion excluding the portion allocated to the Export Development Fund and Bangladesh Investment Development Fund, in line with IMF's BPM6 standard.

"We estimate end-2023 FX reserve coverage of current external payments at 3.0 months, against a 'BB' median of 4.4 months, based on the reserves reported under BPM6," Fitch says in its latest reckonings.

It feels that the country's foreign-exchange-reserve outlook is challenging, amid a still-managed exchange rate, elevated oil prices and a further relaxation of import restrictions, which will widen the current-account deficit through to 2025.

"It remains uncertain whether the shift to a single exchange-rate mechanism from multiple rates will stem the decline in reserves due to implementation challenges, while high inflation might prevent greater exchange-rate flexibility".

"We expect reserve coverage of current external payments at about 2.6 months over 2024-2025. The IMF's June-end FX reserve target was not met."

Bangladesh should be able to meet its external debt obligations over 2024-2025, even with lower external buffers.

"External debt service is low relative to peers, averaging at about 5% of current external receipts over 2023-2025, against a 'BB' median of 11 per cent."

External refinancing risk is further reduced by the external creditor composition - at 59 per cent multilateral and 41 per cent bilateral. Funding from these sources is expected to continue.

An IMF programme, agreed in January 2023, should support the external position, although this depends on meeting programme targets.

The ratings show gross general government revenue-to-GDP ratio far below the 'BB' median.

The IMF requires Bangladesh to improve its revenue-GDP ratio, and projects a ratio of 8.8 per cent in the financial year ending June 2023 (FY23) and 10.3 per cent in FY26.

"This is challenged by large tax exemptions, evasion and weak tax administration."

Fitch found the IMF's June-end revenue target not been met.

The FY24 budget targets a deficit of 5.2 per cent of GDP and a revenue/GDP ratio of 10 per cent, from 9.8 per cent in FY23.

"We expect a deficit of 5.3 per cent, given our lower growth forecast of 6.5 per cent, against the budget's 7.5 per cent, and little revenue reform progress."

And the debt-GDP ratio remains below that of the 'BB' median.

"Our baseline assumption forecasts government debt to increase moderately to 37.2 per cent of GDP by FY25, from 33.8 per cent in FY22." It notes this is significantly below the projected 51.7 per cent of the 'BB' median.

Fiscal risks include sustained fiscal slippage, the extension of forbearance measures to the banking sector and potential contingent liabilities owing to the debt of state-owned enterprises and the banking sector. The agency regards the health of the banking sector and its governance standards as weak, especially among public-sector banks.

Official data reveal a high system gross non-performing loan (NPL) ratio of 8.8 per cent at end-March 2023.

The NPL ratio of state-owned commercial banks, at about 20.0 per cent, is much higher than the 6.0 per cent of private-sector banks and 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."

Fitch Ratings has revised the Outlook on Bangladesh's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable, and affirmed the IDR at ‘BB-’.