Global rating agency Fitch finds Bangladesh's financial front fairly stable largely for thrift measures and export rise, though some downside risks loom from global price rises and domestic economic slowdown.
It rated the country's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' with a stable outlook, unless unforeseen factors upset it.
Fitch Ratings, one of the top three international rating agencies, has affirmed the latest ratings released Thursday, with an extensive analysis of Bangladesh's macroeconomic indicators, domestic sociopolitical ecosystem in the perspective current global affairs.
It cautions that Bangladesh has some downside risks on grounds of a renewed surge in global fuel-and food costs stemming from the Russia-Ukraine war.
The New York-based global credit-rating agency says the foreign-exchange-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," the Fitch Rating's latest report on Bangladesh reads.
It says foreign-exchange reserves fell 16 per cent to US$38.9 billion in August amid surging imports and foreign currency (FX) intervention by the central bank.
However, it believes pressure on reserves should ease following policy measures to curb imports, a hike in administered fuel prices of nearly 50 per cent and greater exchange-rate flexibility.
The international credit-rating agency expects economic activity to slow to 5.0 per cent in the fiscal year ending June 2023 (FY23), given the temporary measures to contain imports and curb electricity consumption.
However, growth should pick up to 6.4 per cent in 2024 as these measures are eased along with a fall in commodity prices.
It notes that recovery from the Covid-19 pandemic has continued, with GDP expanding by 7.3 per cent 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 per cent year on year."
Bangladesh's government debt-to-GDP ratio remained much lower than its 'BB' median. It means the country is in good position in the indicator.
Fitch finds health of the country's banking sector and its governance standards weak, especially among public-sector banks.
Quoting official data the agency says the banking system's gross non-performing loan (NPL) ratio reached 8.5 per cent by the end of March 2022, from 7.9 per cent at the end of 2021.
The NPL ratio of state-owned commercial banks, at 20 per cent, is substantially higher than the 5.8 per cent 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 per cent as of March 2022, against 11.08 per cent at end-2021, while the CAR of state-owned banks was 6.8 per cent, up from 3.7 per cent.
The agency mentioned that Bangladesh falls in the 23rd percentile on the World Bank's composite governance score, compared with 47th for the 'BB' median.
"Foreign direct investment is constrained by large infrastructure gaps, although government projects in the next few years could bode well for investment," the report notes.
It further notes that the security situation in Bangladesh has improved in recent years and is now of less concern to foreign visitors, although the risk of a recurrence and political turmoil remains.
The Stable Outlook reflects its view that the move to greater exchange-rate flexibility and 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.
"We also expect the current-account deficit to narrow to 3.0 per cent of GDP in 2023 and 2.3 per cent in 2024, from 4.0 per cent in 2022, with FX reserves averaging at US$34 billion, or 4.7 months of current external payments, in 2023-2024".
The rating agency says Bangladesh is negotiating an IMF programme, possibly for 2023, to finance climate change-related measures. "We do not think the country faces refinancing stress in the near term, but an IMF programme could support its external position and benefits policy credibility."
Bangladesh's external-debt service is low relative to peers, averaging at 6.0 per cent of current external receipts over 2023-2024, against the 12 per cent 'BB' median.
External-refinancing risk is reduced by the external-debt creditor composition, at 53.8 per cent multilateral and 46.2 per cent bilateral.
"Our baseline assumptions forecast government debt to increase moderately to 38.3 per cent of GDP by FY24". This is significantly below the projected 54.3 per cent of the 'BB' median.
But it identified some fiscal risks. "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."
The general government revenue-to-GDP ratio remained weak, it said, adding 9.8-percent revenue-to- GDP ratio in FY22 is a key credit weakness.
"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 per cent of GDP. The deficit could undershoot government's target, as occurred in the past, but the agency's FY23 economic growth forecast trails government's 7.5 per cent, meaning that the budget deficit is likely to slightly exceed government target.
Bangladesh has an ESG (Environmental, Social and Governance) relevance score of '5' for both Political Stability and Rights and the Rule of Law, Institutional and Regulatory Quality, and Control of Corruption.
These scores reflect the high weight that the World Bank Governance Indicators (WBGIs) has in its proprietary Sovereign Rating Model.
Bangladesh has a low WBGI ranking in the 23rd percentile, reflecting the relatively weak rights for participation in the political process and institutional capacity, uneven application of the rule of law, and a high level of corruption, it says.
It predicts a sustained and rapid rise in government debt over the medium term, for example, due to continued fiscal easing, the absence of structural improvements in public finances, or the crystallisation of contingent liabilities related to banks or other state-owned enterprises.