Fitch affirms Bangladesh at ‘BB-‘; Outlook stable

Fitch Ratings has affirmed Bangladesh’s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at ‘BB-‘. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling has been affirmed at ‘BB-‘ and the Short-Term Foreign- and Local-Currency IDRs at ‘B’. KEY RATING DRIVERS Bangladesh’s ratings balance strong foreign-currency earnings and high and stable real GDP growth against weak structural indicators, significant political risk and weak banking-sector health. Bangladesh’s external finances are supported by comfortable and gradually rising foreign-exchange reserves, amounting to USD32.1bn in December 2016 (7.9 months of current external payments, compared with 4.4 months for peers in the ‘BB’ category). Remittances have started to decline in mid-2016, however, especially inflows from the Middle bbEast, leading to an 11% drop in 2016 to USD13.6bn. Bangladeshi ready-made garment exports continued to be strong, accounting for 81% of total exports and earning the country USD26.1bn in the first 11 months of 2016 (USD24.6bn in 2015). In 2017, this sector may feel the pinch of further real effective exchange rate appreciation, although Bangladeshi labour costs are still relatively low. Bangladesh’s real GDP growth is high at a five-year average of 6.5% compared with the ‘BB’ category median of 3.5%. Growth has been remarkably stable over the years despite both political turmoil and natural disasters. In the financial year ended 30 June 2016 (FY16), GDP growth was 7.1%, supported by increased purchasing power from public-sector wage hikes and monetary policy loosening. Fitch expects GDP growth to decline to 6.6% in FY17 and 6.4% in FY18, in part due to lower consumer spending resulting from falling remittances. Inflation is relatively high compared with peers, averaging 5.4% in the first half of FY17, but below the authorities’ target of 5.8% set for FY17. Political and safety risks remain substantial in Bangladesh. Security incidents or political turmoil could inflict long-term economic harm if it deters foreign investors and buyers of Bangladeshi goods, especially ready-made garments, from doing business in Bangladesh. Calm has returned after political violence erupting in 2014 and 2015, but continued strong political polarisation could again lead to widespread violence and blockades, especially nearer to parliamentary elections, which are to be held no later than January 2019. The risk that the sovereign will need to provide considerable additional support to the banking sector is substantial, although the small size of private credit, at just 36.5% of GDP, would moderate the impact. The sector’s health and governance standards are generally weak, particularly in public-sector banks. The official non-performing loan ratio is high at 10.3% in 3Q16, while the capital adequacy ratio (CAR) is low at 10.3%, down from 10.6% in 1Q16. The CAR for the six state-owned commercial banks was just 5.6%. Bangladesh’s general government debt was 32.4% of GDP in FY16, which compares well with the ‘BB’ median of 51.4%. However, the government’s revenue intake of 9.9% of GDP is the second-lowest of all sovereigns rated by Fitch after Nigeria, implying limited fiscal space to boost badly needed infrastructure development. Implementation of the new VAT has been postponed to July 2017. The new VAT has the potential to significantly boost revenues, but the impact will depend on the details, such as the final tax rate and whether the rate will be uniform for all products. Bangladesh scores poorly on a broad range of structural indicators, such as the World Bank’s governance indicator (22nd percentile versus the ‘BB’ median of 50th percentile). GDP per capita of USD1,443 is well below the ‘BB’ peer category median of USD5,325, although major improvements have taken place over the past decade on a number of social metrics. The difficult business environment is illustrated by the country’s position of 176th out of 190 countries in the World Bank’s Ease of Doing Business report, while a large infrastructure deficit also hampers investment. However, the government seems focused on making progress on some big ongoing infrastructure projects, including the Padma Multipurpose Bridge. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch’s proprietary SRM assigns Bangladesh a score equivalent to a rating of ‘BB’ on the Long-Term Foreign-Currency IDR scale. Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR by applying its QO, relative to rated peers, as follows: – Structural Features: -1 notch, to reflect political risk arising from a polarised political environment and domestic security concerns, as well as weak banking-sector health and governance. Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The Stable Outlook reflects Fitch’s assessment that upside and downside risks to the rating are well-balanced. The main factors that individually, or collectively, could trigger positive rating action are: – An improvement in governance, which would strengthen the business climate and could improve banking-sector health – A reduction in political risk or domestic security concerns The main factors that individually, or collectively, could trigger negative rating action are: – Protracted substantial economic disruption from materialising political risk or a deterioration in the security situation – A significant rise in the government debt-to-GDP ratio, for example due to substantial government support for the banking sector KEY ASSUMPTIONS – The global economy performs broadly in line with forecasts in Fitch’s latest Global Economic Outlook. Contact: Primary Analyst Thomas Rookmaaker Director +852 2263 9891 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Secondary Analyst Mervyn Tang Director +852 2263 9944 Committee Chairperson Jan Friederich Senior Director +852 2263 9910 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1017596 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001


Share: