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Bangladesh BB- rating confirmed by Standard and Poor’s

ECONOMYNEXT – Standard and Poor’s said it was confirming a BB- long term rating of Bangladesh saying despite several challenges the country was would show higher growth than its peers.

Bangladesh central bank has kept a stable exchange rate for several years with a relative high real effective exchange rate characteristic of stable pegs and currency boards, whose inflation indices tend to rise as wages go up.

S& P said Bangladesh per capita income was low and debt service costs were relatively high.

“We weigh these factors against consistently fast economic growth and a balanced external position, reflecting substantive engagement with bilateral and multilateral development partners, large remittances from overseas Bangladeshi citizens back to the country, and a globally competitive garment sector,” the rating agency said.

“Despite stout near-term challenges, we expect Bangladesh to continue to achieve higher-than-average economic growth compared with its peers.”

The full statement is reproduced below:

SINGAPORE (S&P Global Ratings) Aug. 24, 2021–S&P Global Ratings today affirmed its ‘BB-‘ long-term and ‘B’ short-term sovereign credit ratings on Bangladesh. The outlook remains stable.

Outlook

The stable outlook reflects our expectation that Bangladesh’s solid growth prospects will prevail against the risks associated with the COVID-19 pandemic over the next 12 months.

Upside scenario

We may raise the ratings if the government materially improves its fiscal outcomes, including its very low revenue generation and elevated fiscal deficits. We may also raise the ratings if we observe that Bangladesh’s institutional settings have markedly improved.

Downside scenario

We may lower the ratings if fiscal and external debt metrics weaken further. We could also lower the ratings if external debt and financing metrics worsen materially, such that narrow net external debt surpasses 50% of current account receipts, and gross external financing needs exceed 100% of current account receipts plus usable reserves, on a sustained basis.

Rationale

The ratings on Bangladesh reflect the country’s modest per capita income and diminished fiscal flexibility owing to a combination of limited revenue-generation capacity and elevated debt-servicing costs. Evolving administrative and institutional settings represent additional rating constraints.

We weigh these factors against consistently fast economic growth and a balanced external position, reflecting substantive engagement with bilateral and multilateral development partners, large remittances from overseas Bangladeshi citizens back to the country, and a globally competitive garment sector. Despite stout near-term challenges, we expect Bangladesh to continue to achieve higher-than-average economic growth compared with its peers.

Institutional and economic profile: Recovery in global demand will support ongoing economic recovery

Bangladesh’s economic recovery momentum will continue to build over the next one to two years following a real expansion of 5.5% in the fiscal year ended June 2021.

Bangladesh’s severe COVID-19 outbreak may act as a near-term brake on economic activity, but the impact is unlikely to derail the nascent recovery.

Bangladesh’s highly concentrated political landscape may constrain the effectiveness of institutions and limits checks and balances on the government.

Bangladesh’s economy has been hit by the pandemic following a steep deceleration in the fourth quarter of fiscal 2020 (April-June 2020) when strict lockdown measures were adopted in the early phase of the outbreak. Domestic restrictions and volatile external conditions drove a weak expansion of just 1.7% in the country’s critical manufacturing sector, contributing to a multi-year low real GDP expansion of just 3.5% in fiscal 2020. Over the past year, the economy has embarked upon a gradual recovery, with a progressive normalization of external demand conditions helping to stabilize output and employment in Bangladesh’s manufacturing sector. Trade flows and associated employment in external-oriented industries, such as garment manufacturing, have improved, with real GDP growth recovering to 5.5% in fiscal 2021.

Bangladesh’s current pandemic wave has produced the country’s highest daily case count to date, although there has been some easing of case numbers over recent weeks. In an effort to battle the outbreak, which is likely driven by more contagious variants of the coronavirus, the government implemented strict measures, including limitations on operations in the manufacturing sector. Some of these expired in mid-August.

We expect the impact on economic growth to be much more contained than in the final quarter of fiscal 2020, because recent measures to counter the spread of the coronavirus are more calibrated and are generally lifted more quickly if infections continue to decline. We forecast real GDP growth will climb to 7% in fiscal 2022 on relatively weak base effects and a continued normalization of external and domestic demand conditions, particularly in the second half of the fiscal year.

Modest per capita income, which we estimate at about US$2,363 for fiscal 2022, remains one of Bangladesh’s main rating constraints. This level of per capita income limits the fiscal and monetary flexibility needed to respond to exogenous shocks.

Balancing these impediments, Bangladesh’s weighted average real per capita GDP growth of about 5.3% over 2015-2024 indicates a consistently strong growth performance. We assess its economic growth as being much stronger than sovereigns at a similar level of income, which is supportive of our credit ratings on Bangladesh.

The economy has proven its resilience through a variety of political and financial crises over the past two decades, and we expect its strong trend growth performance to remain largely intact. The country’s garment industry remains highly competitive on a global basis, with low unit labor costs and ample supply of labor. Demographics continue to favor Bangladesh, and the government is working on strengthening access to key external markets ahead of its expected graduation from least developed country (LDC) status in 2024, with a potential extension to 2026.

Bangladesh’s highly concentrated domestic political conditions may undermine the predictability of future policy responses. The confrontational stance between the ruling Awami League and opposition Bangladesh Nationalist Party (BNP) reflects deep division between the historically prominent political parties. Given its evolving institutional settings, infrastructure deficiencies, high levels of perceived corruption, and uneven business environment, Bangladesh’s foreign direct investment has remained persistently low.

The political landscape in Bangladesh remains polarized, with considerable power centered with the ruling Awami League. The opposition coalition’s decision to join parliament has helped to restore a degree of stability to the fractious environment. That said, the opposition’s representation in parliament remains extremely small, limiting checks and balances on the government.

Against this backdrop, Bangladesh’s economic outcomes nevertheless have been strong compared with peers and are expected to remain so in the medium term.

Flexibility and performance profile: Weak revenue base, high cost of borrowing constrain fiscal metrics

Improving external demand conditions will help to offset cooling remittance growth following record inflows amid the pandemic.

Fiscal revenue remains low despite value-added tax (VAT) revisions in 2019, limiting consolidation prospects and raising the government’s interest burden.

The government’s net indebtedness will stabilize as nominal GDP growth improves.

Bangladesh’s fiscal deficit is likely to remain elevated this year owing to some additional pandemic-related expenditure, along with the government’s modest revenue performance. We forecast the associated change in net general government debt to average 5.6% of GDP annually over fiscals 2022-2024.

The Bangladesh government has introduced a variety of measures aimed at mitigating the impact of the pandemic on individuals and businesses. These measures include direct cash assistance to vulnerable segments of society, lending schemes for exporters, and working capital facilities and interest subsidies for businesses. However, total direct fiscal outlays were estimated at just US$2.2 billion as of April 2021, or approximately 0.6% of GDP up to that point.

Despite higher pandemic spending and continued efforts to boost capital expenditure over recent years, many basic social and infrastructure needs in Bangladesh remain unmet, implying a higher potential expenditure burden in the future.

Bangladesh’s higher fiscal deficits amid the pandemic have led to a material rise in net general government debt, which we project at 34.1% of GDP by the end of fiscal 2022, versus an estimated 28% in fiscal 2020.

The government continues to fund itself partially through the issuance of costly national savings certificates (NSCs), with interest rates well above the market rate. While we expect the government to eventually shift toward less costly capital market borrowing over the long term, higher NSC funding in the midst of the pandemic will prolong this process. Net NSC issuance accounted for over 16% of total financing in fiscal 2021, compared with 10% in fiscal 2020. The costly nature of NSC funding contributes to Bangladesh’s elevated interest burden. We forecast the government’s interest payments will account for greater than 20% of revenue through at least 2024.

Bangladesh’s narrow revenue base constrains the government’s flexibility to provide fiscal support to the economy during periods of stress, and to fund important social and capital expenditure requirements.

The country has only approximately 5 million registered taxpayers (out of a population of approximately 160 million). General government revenue was less than 10% of GDP in fiscals 2017 to 2020–among the lowest of rated sovereigns globally. The government has outlined numerous initiatives to expand the tax base, culminating most notably with the introduction of new VAT rules in July 2019.

We do not expect significant revenue increases from the initiatives to expand the tax base relative to the size of the economy. Additionally, since the onset of the pandemic, the government has announced various support measures that will have an impact on medium-term revenue generation. These measures include a hike to the taxable income threshold for individuals in the fiscal 2022 budget. The tax rate for unlisted companies will reduce to 30% from 32.5%, and that for listed companies to 22.5% from 25%. These steps have put downward pressure on an already-weak revenue profile.

The Bangladesh sovereign faces limited risk of contingent liabilities from the banking sector. The sector is relatively small with assets less than 100% of GDP. We classify Bangladesh’s banking sector in group ‘9’ under our Banking Industry Credit Risk Assessment (with ‘1’ being the highest assessment and ’10’ being the lowest).

Although the private sector banks are in better shape, there are notable risks in the state-owned commercial banks (SOCBs). SOCBs account for less than 30% of total banking sector assets, and their nonperforming loans ratio is considerably higher than that of peer commercial banks.

Bangladesh’s credit profile benefits from low external borrowings. The country has large remittance inflows and an internationally competitive garment export sector, resulting in a generally modest current account deficit.

However, Bangladesh faces some risks to its external profile because of the COVID-19 pandemic and structural trends. The weakened state of the global labor market, combined with the unusually high level of remittances recorded in fiscal 2021, suggests that net inflows may be lower over the next one to two years.

In particular, fiscal 2021 remittances may have been considerably higher than trend owing to the repatriation of workers as unemployment rates in overseas markets rose over the course of the past 18 months. Over time, the gradual recovery in overseas labor markets is likely to be supportive of further growth in remittances, but net inflows will also be lower as a proportion of GDP.

As the export momentum continues to stabilize and improve, we anticipate the demand for Bangladeshi exports will recover further, with momentum likely to improve in the second half of 2022. While we expect its current account deficit to increase from fiscal 2021, the relative import compression, especially of intermediate and capital goods, should keep help to keep it below 2% of GDP. We forecast Bangladesh’s current account deficit to increase this fiscal year to about 1.8% of GDP.

In our view, despite the increase in the current account deficit during the forecast period, Bangladesh’s external balance sheet and liquidity will remain supportive of the broader credit profile over the next one to two years. We expect gross external financing needs to remain stable at slightly more than 80% of current account receipts plus usable reserves over 2022-2024.

This however implies that the gap between the country’s external debt and its liquid external assets is unlikely to decline. Likewise, we project Bangladesh’s narrow net external debt to average approximately 47% of current account receipts throughout the forecast period. Strong growth in exports in fiscal 2022 will mitigate the gradual erosion of Bangladesh’s external buffer.

Bangladesh’s external profile draws substantial donor support, ensuring that the bulk of public external debt is low-cost borrowing with long maturity. Additionally, donors and multilateral lenders have in the past provided some degree of direct budgetary support, which may carry conditions for policy formulation.

Since the onset of the pandemic, Bangladesh has secured considerable official creditor financing, including US$732 million in emergency assistance under the IMF’s Rapid Credit Facility and Rapid Financing Instrument facilities. We have also added approximately US$1.4 billion to Bangladesh’s foreign exchange reserves to reflect the IMF’s increased allocation of special drawing rights.

We view Bangladesh’s monetary assessment as a neutral factor to the rating. The central bank’s limited independence, multiple mandates, and underdeveloped capital markets hamper monetary flexibility. We consider Bangladesh’s exchange rate regime as a crawl-like arrangement, which provides some flexibility to mitigate external shocks.

However, despite gradual depreciation in the exchange rate since 2015, Bangladesh’s real effective exchange rate (REER) has been rising, reflecting the currency depreciation of its trading partners.

Should the REER continue to rise, it could strain the competitiveness of the country’s export garment sector. Bangladesh’s central bank has made progress in managing inflationary expectations. Since 2015, inflation has generally remained below 6% annually.

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Sri Lanka discussing giving extra land, water for Chinese oil refinery

ECONOMYNEXT – Sri Lanka is in discussions with China’s Sinopec to give extra land and assure water supplies after the company decided to expand the capacity of a planned oil refinery in Hambantota, Energy Minister Kanchana Wijesekera said.

“There are concerns on how the water supply is going to be provided for the refinery,” Minister Wijesekera told reporters Friday.

The refinery will need more land and also revise conditions in a Board of Investment agreement, he said.

Read more
Sinopec to double capacity of new refinery in Sri Lanka’s Hambantota

Recommendations and decisions from Sri Lanka’s side had already been sent and Sinopec is expected to revert back in May.

“We are hoping to sign the agreement once everyone has agreed,” Wijesekara said.

The principle agreements are expected to be signed by June, he said.

The refinery could sell up to 10 percent of its output in the domestic market.

“There is no commitment by the government to purchase anything,” Minister Wijesekera said. (Colombo/Apr19/2024)

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Sri Lanka rupee closes weaker at 302.00/50 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 302.00/50 to the US dollar in the spot forex market on Friday, down from 301.50/302.00 a day earlier, dealers said.

There was increased demand for dollars after the central bank bought 715 million dollars from forex markets. In the previous two months it was buying on average about 200 million US dollars, leaving market participants and bank in a ‘oversold’ position.

There were some official dollars sales Friday dealers said.

READ Sri Lanka rupee quoted wide to US dollar as peg inconsistencies flare up

Bond yields were broadly steady.

A bond maturing on 15.12.2026 closed at 11.30/40 percent down from 11.35/40 percent.

A bond maturing on 15.09.2027 closed at 11.95/12.05 percent up from 11.90/12.05 percent.

A bond maturing on 15.12.2028 closed stable at 12.15/25 percent.

A bond maturing on 15.09.2029 closed stable at 12.30/40 percent.

A bond maturing on 01.10.2032 closed stable at 12.40/50 percent. (Colombo/Apr19/2024)

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Sri Lanka stocks close down, banks trade down

ECONOMYNEXT – The Colombo Stock Exchange closed down on Friday, data on its site showed.

The broader All Share Index closed down 0.38 percent, or 44.80 points, at 11,753; while the S&P SL20 Index closed down 0.53 percent, or 18.46 points, at 3,456.

Turnover was at 1.4 billion. The diversified financials (Rs366mn) and banks (Rs266mn) sectors continued to see selling pressure.

“This was possibly due to uncertainty around the bond discussions,” market participants said.

With the exception of Sampath Bank Plc (up at 77.50) all other banks traded down in the day. Commercial Bank of Ceylon Plc was down at 104.50, Hatton National Bank Plc was down at 188.50, and DFCC Bank Plc was down at 77.00.

LOLC Finance Plc saw the most trades and closed up at 6.40. Another LOLC company, Browns Investments Plc, also saw high traded volumes and closed up at 5.60.

Softlogic Capital Plc was up at 7.00, and Softlogic Holdings Plc was up at 11.20. A trading suspension imposed on SHL.N0000 was lifted effective today as the company submitted the annual report for the year ended 31st March 2023.

However, shares of the Company will remain in the Watch List “due to Qualified Audit Opinion and Emphasis of matter on going concern in the Independent Auditor’s Report in the Audited Financial Statements for the year ended 31st March 2022.”

Dialog Axiata Plc, which announced its merger with Bharti Airtel Thursday, saw its share price close up at 11.90.

“There was some traction on index heavyweights,” market participants pointed out.

Top contributors to the APSI included Aitken Spence Plc (up at 134.50), Ceylon Tobacco Company Plc (up at 1,245.25, and Lion Brewery (Ceylon) Plc (up at 1,048.50).

There was a net foreign inflow of 5 million. (Colombo/Apr19/2024)

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