http://www.thedailystar.net/newDesign/news-details.php?nid=134126
Sovereign rating: What’s next?
A worker is seen at a spinning mill in Gazipur. Bangladesh's economic growth has averaged close to 6 percent over the last decade, backed by resilient apparel exports. Photo: Amran Hossain
Mamun Rashid
Bangladesh’s potential as a reliable destination for international creditors and investors was positively recognised by the international credit rating agency Standard and Poor’s (S&P) early last week.
S&P’s rating of BB- takes into account Bangladesh’s robust macroeconomic fundamentals, as reflected by strong economic growth (GDP has averaged close to 6 percent over the last decade), strong external liquidity, supported by resilience in apparel exports and remittance, as well as external donor funding and an improving FX reserve ratio (at over four months of imports).
S&P has also highlighted that measures to expand revenue and an uptick in investment will prompt an upward move. This bodes well for foreign inflows and the taka.
Bangladesh’s positive outlook was also reaffirmed by Moody’s, another international rating agency, which has assigned a first-time sovereign rating of Ba3 to the country. The outlook is stable.
Moody’s said the Ba3 foreign and local-currency sovereign bond ratings broadly incorporate Moody’s assessment of Bangladesh’s reasonable degree of financial and balance-of-payment robustness which, coupled with prospects for continued macroeconomic stability, reduces the likelihood of severe stress on the country’s creditworthiness.
Since the agencies that have done the rating are prestigious institutions of global standing, it can be said that their evaluations have put Bangladesh in a fresh light among the international business community.
The good news is in the South Asian context, Bangladesh’s scorecard with a BB- from S&P’s and Ba3 from Moody’s for a long term is placed above Sri Lanka and Pakistan, though below India.
On any account, this is a great achievement so far as the rating reflects our economic status and prospect in spite of the constraints on its infrastructure and energy fronts.
Now, how does Bangladesh stand to gain from such rating by an international agency?
This first ever rating will certainly help dispel any misgiving that the international investors and creditors might have had about the country’s real potential as a business partner and an investment destination. Rather than depending on hearsay, guessing and double guessing, they will now be able to take decisions on the updates available from S&P’s and Moody’s database.
Bangladesh itself will now know its actual position vis-à-vis other economies, especially the economies competing for the same pie of the cake, be able to concentrate more on addressing weak spots in its economic map and chart out appropriate deliverables to improve its status in its dealings with international partners. Sovereign rating should help rationalise the premium charged by official agencies, export credit agencies and foreign lenders.
Though ratings have termed the economy’s outlook stable, the rating agencies, however, have not failed to point to fiscal constraints, the low-income status and huge development needs that still burden the economy.
So, according its prognostications, the durability of such an outlook depends on how prudently macroeconomic policies are framed and maintained and how microeconomic reforms address the growth constraints.
Moody’s analyst mentioned: “The lack of fiscal flexibility is also reflected in a high government debt-to-revenue ratio of 350 percent, resulting, once again, from shortcomings in revenue generation.”
Bangladesh’s impending tax reforms in the forthcoming fiscal year are particularly important in supporting its credit outlook.
“This will not only support improved fiscal flexibility and debt affordability, but the reforms will also underpin much-needed expansion of public development expenditure,” said Moody’s.
As expected, the business community, especially bankers, have been enthused by the positive rating of the economy. They felt the rating will create confidence and provide access to capital for development. Bangladesh should be able to negotiate with OECD (Organisation for Economic Co-operation and Development) for an upgrade of ranking from 6 to at least 5.
Global investors regard sovereign rating as a vital international benchmark when considering direct and portfolio investment in a country’s private sector. Foreign direct investment (FDI) and portfolio flows should increase. Investors now have a clearer than ever understanding about investment risks in Bangladesh.
This was quite ambiguous until the sovereign rating was in place. Finally, sovereign rating is a transparent benchmark for pricing Bangladesh corporate issuances too.
Bangladesh is now truly in the club of Asian Tiger nations along with Vietnam and Indonesia.
We still need to do the necessary work to improve our conditions, such as removing the bottlenecks towards ensuring a steady supply of energy for the industries, developing befitting infrastructure to augment growth, driving necessary reforms and improving overall governance with institution building.
These are the necessary preconditions to attract international creditors and investors on a sustainable basis. Bangladesh has a bright future. But we have to do our homework.
The writer is a banker and economic analyst. He has been engaged in the sovereign rating process for Bangladesh over the last several years.
