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Rating outlook stable: S&P

The agency warns Bangladesh against low revenue, large subsidy and political unrest

Star Business Report
The Standard & Poor's (S&P) has kept Bangladesh's credit ratings unchanged with a stable outlook, but warned against low revenue, large subsidy and political unrest.
The global rating agency assigned the country 'BB-' long-term and 'B' shortterm foreign and local currency sovereign credit ratings, according to a statement released yesterday.
This year's ratings are the same the agency affirmed Bangladesh in 2011.
Bangladesh ranks second highest in South Asia behind India (BBB-) and ahead of Sri Lanka (B+) and Pakistan (B-). Other countries in the BB category along with Bangladesh include Turkey, the Philippines, Indonesia and Vietnam.
Still, Bangladesh's BB- rating is a noninvestment grade, which indicates that the country is less efficient in payingoffits debts.
S&P said the ratings on Bangladesh incorporate the sovereign's limited fiscal flexibility due to low revenue generation capacity and expenditure-side rigidities stemming from significant physical and human capital development needs, and a large subsidy regime.
Low economic development and an adversarial domestic political setting are also rating constraints.
It said these constraining factors are
weighed against strong and stable economic growth, and ongoing substantial donor and multilateral engagement, which will help policy formulation and sustain improvement in debt ratios.
“We could raise the ratings if the government succeeds in expanding the revenue base and improving collection efficiency, leading to a material improvement in its fiscal performance,” said the rating agency.
It projects the country's total revenue at 13 percent of GDP, including grants, in fiscal 2012, which ranks as one of the lowest among sovereigns it rates, accord-ingto S&P's credit analyst Agost Benard.
Energy, infrastructure and administrative bottlenecks are the other major issues that prompted S&P not to upgrade Bangladesh's ratings.
Limited fiscal flexibility has contributed to years of public underinvestment, stunting the country's growth potential, said the analyst.
Bangladesh's low wealth level at a per capita GDP of $637 (2011), weak institutions and governance and political instability are key rating constraints.
S&P believes that such low incomes afford minimal policy and political flexibility when responding to exogenous shocks, or if severe policy adjustments were needed to avoid default.
“Bangladesh's weak institutions and governance hamper investment and development, while its volatile political setting detracts from legislative efficiency and harbours the potential for instability. These factors are additional rating constraints,” observed the rating agency.
But Benard said such credit weaknesses are balanced against strong growth and external support.
“In our view, the strength of key economic segments — garment, remittances and agriculture — will sustain growth in line with recent trends, rising to about 6.7 percent by 2015, as global demand recovers,” Benard added.
The stable outlook reflects strong growth prospects and ongoing donor support, which ensures low-cost and long-maturity external debt and minimises refinancingrisk.
S&P said these factors are balanced against lingering inflation risk and balance of payments pressure as imports expand.
Conversely, the firm could have downgraded the sovereign ratings if the country's fiscal slippages result in rising public debt and external donor support declines materially or due to other substantial deviation from the policies required under the IMF Extended Credit Facility programme.
The Bangladesh Bank, the country's central bank, has hailed the S&P ratings and said the stable outlook came due to the BB's policy response to the balance of payments pressures.
“The stable outlook for Bangladesh is particularly significant given that the global economic crisis has led to downward ratings revisions for many other countries,” said Hassan Zaman, senior economic adviser to the governor.
Forinstance, Zaman said, in April S&P changed India's outlook from 'stable' to 'negative' and Vietnam is rated the same as Bangladesh, but it has a negative outlook.
“The S&P team told us that one of the key reasons they were retaining the ratings outlook was because of the policy response to the balance of payments pressures Bangladesh faced towards the end of last year," he said.
“They (S&P) were encouraged that the exchange rate was allowed to depreciate limiting the losses to our foreign reserves; monetary policy was more restrained limiting import demand, and external financing from