http://www.thedailystar.net/newDesign/news-details.php?nid=128124
Yields of a rated Bangladesh
Mamun Rashid
Bangladesh is in the process of obtaining a sovereign credit rating. Noted rating agencies like Standard and Poor’s and Moody’s have been invited to drive this exercise, while three international banks operating in Bangladesh have been requested to provide them with necessary assistance (Standard Chartered and HSBC are advising for S&P and Citibank NA for Moody’s). A team has been formed with participation from relevant government agencies to support this process. Nobody less than the Bangladesh Bank governor, finance minister and secretary, along with the investors are taking keen interest in this process.
A sovereign rating is a forward-looking estimate of a borrower’s default probability based on a combination of historical performance and forward projections. Initial rating is always the toughest one, and a lot of work and senior level engagement are needed from the government. A rating not only assesses the likelihood of a country’s defaulting on its debt obligations, but also gives a strong signal about the overall health of the economy. A rating assumes even more significance for a developing country in terms of creating confidence and providing access to capital for development. In today’s global environment, a non-rated sovereign draws more negative attention than does a less-than good rated one.
Perceived investment risk of an unrated country often surpasses the facts on the ground, thereby increasing the risk premium that they ask for. This often leads to an unattractive value proposition. Bangladesh is already paying the price for not having a quantifiable sovereign rating.
A sovereign rating helps the investors in bringing their own internal risk appraisal in congruence with that of the market, thus reducing risk premium.
By obtaining a rating, Bangladesh will be able to enjoy benefits including: (i) a universally accepted measure of strong creditworthiness (ii) establishing a platform to facilitate immediate access to international capital markets (iii) precursor to establishing routine of investor education exercises and (iv) establishing itself as a sophisticated issuer in the international capital markets.
Bangladesh has embarked on a successful economic reform process, and made a great progress on most of the socio-economic issues including addressing institutional weaknesses. Bangladesh has passed through various events in the recent past, such as flood, Word Trade Organisation cutover, oil price hike, and has shown its strong resilience. Also, Bangladesh has never defaulted on any international financial obligations.
Given Bangladesh’s economic progress, the generally improved sentiment toward Asian sovereigns and the positive momentum of the political situation, experts believe the time is right to approach the agencies.
Naturally, the question would come to readers’ mind that what Bangladesh’s rating will be. While the answer to this question can be given by the respective agencies, I would like to present some data to have a broader understanding about where we can expect to see Bangladesh. Table 1 shows the rating scales of different agencies. Table 2 gives a comparative analysis of some other rated countries with Bangladesh.
While, the above table shows some attractive macroeconomic statistics for Bangladesh relative to its peer countries, it does not fully capture various qualitative strengths of the economy as well as of the country. I would like to highlight on some of them:
- Largely positive macro-economic environment based on public sector reforms, double digit export growth, relatively stable exchange rate, improving social indicators, etc.
- Investment climate in Bangladesh compares rather favourably with most South Asian countries. Bangladesh is blessed with huge reserves of natural gas and coal. Bangladesh has a large domestic market, with steadily rising disposable income among the middle class. Thirty-five percent of population is under 14 years of age while 61 percent between 15-64 years of age (Median age 23), coupled with growing purchasing power of an ever growing middle class; Bangladesh is in a unique position to attract entrepreneurs from home and abroad. Bangladesh is one of the least urbanised countries in the lists of Goldman Sachs and JP Morgan creating significant opportunity space. Competitive labour costs and flexible labour laws are key factors encouraging investment.
- Revenue Reforms Commission and Public Expenditure Reform Commission are set up to rationalise government finances. Reforms of state-owned enterprises, including privatisation, public-private partnership and energy sector rationalisation, have been initiated. Bangladesh Development Forum has provided an opportunity to the donors to focus on Bangladesh’s development needs.
- Financial sector achieved tremendous progress in terms of having repo, reverse repo and inter-bank repo. Primary Dealers guideline has been introduced for better convenience of underwriter and traders. Dhaka inter-bank offer rate (DIBOR) has been introduced to help develop an overnight swap market and a commercially acceptable yield curve for the taka. The Bangladesh Bank has approved a couple of derivative transactions. The Securities and Exchange Commission has outlined clear guidelines for companies to get listed and established stronger surveillance to monitor capital market participants. Total government debt is manageable at 49 percent of GDP (gross domestic product), which is lower than most of the peers. External debt along with current account balance performs better than India, Philippines, Pakistan and Indonesia.
- Stable inflow of remittances helped Bangladesh avoid any balance of payment pressure. The resilience of the economy is not only deriving from the fact that it is mostly insulated from the global markets by regulations, but also from an internally vibrant economy.
It is time to let the world know about our progress. What better way of telling this success story than having some respected international credit rating agencies mentioned above speak for Bangladesh?
