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���������ֳ� - Hong Kong - 11 Nov 2020: ���������ֳ� has affirmed Bangladesh's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook.

Key Rating Drivers

Our rating affirmation balances resilient external finances and rising general government debt (albeit still relatively low) against a low government revenue base and income per capita, and a weak business environment and banking sector.

Bangladesh's economic performance has been hurt by the coronavirus pandemic through reduced external demand, particularly of ready-made garments (RMG) exports, as well as local containment measures. RMG exports constitute approximately 8.5% of GDP, and had fallen by about 20% yoy between January-September. A nationwide lockdown from 26 March 26 to end-May has affected private consumption and investment.

According to official statistics, the economy slowed significantly to 5.2% in the financial year 2020 (FY20, from July 2019-June 2020), from 8.2% in FY19. We expect growth to recover to 5.6% in FY21 and 7% in FY22. However, our growth forecasts are subject to a high degree of uncertainty, and downside risks would be linked to the evolution of the pandemic within Bangladesh and key export markets.

Remittances - an important driver of household consumption and accounting for about 6% of GDP - have been surprisingly resilient, supporting private consumption. Remittances grew by nearly 17% yoy from January-October 2020. We think this rise is temporary, and due partly to factors such as workers repatriating their savings before returning home, but also a shift towards more formal remittance channels, which has been supported by Bangladesh Bank's 2% cash incentive for inward remittances.

Bangladeshi RMG exports (80% of total exports) reached USD27.9 billion in FY20, down from USD34.1 billion in FY19 as demand from key markets, i.e. the EU (62%) and US (18%), has fallen. The outlook for exports remains uncertain, due partly to the pandemic, but there is also little evidence to suggest that Bangladesh might be benefitting significantly from trade diversion due to US-China trade disputes.

Bangladesh has strengthened its external buffers despite the COVID-19 shock. According to the latest data, international reserves increased to about USD40 billion from about USD33 billion at end-2019 reflecting lower imports, higher remittances, and increased borrowing from multilaterals. We estimate foreign-exchange (FX) reserve coverage of current external payments to remain healthy at 8.6 months by end-2020, far above the 'BB' median of 4.8 months.

We believe that Bangladesh Bank will maintain its policy stance for a stable and competitive exchange rate through FX intervention. FX reserves in Bangladesh are high at present, although these could come under pressure if the authorities were to intervene aggressively to support the exchange rate in the event of an external or confidence shock.

Bangladesh will continue to run modest current account deficits from 2021, as imports of capital goods associated with large infrastructure projects rise. However, external financing requirements in the near-term are manageable. ���������ֳ� forecasts the external debt service to be manageable in 2021 and 2022 at around 4% of current external receipts. The IMF approved USD244 million under the Rapid Credit Facility (RCF) and USD488 million under the Rapid Financing Instrument (RFI). Bangladesh has also received support from the World Bank and Asian Development Bank to fund COVID-19-related expenditure.

Bangladesh's increase in expenditure on infrastructure coupled with a poor record of revenue collection has led to a rise in budget deficits in recent years. The pandemic has raised further risks to the fiscal outlook. The authorities' FY20 revised budget deficit is now 5.3% of GDP, up from 4.8%. We expect the actual budget deficit in FY20 to be even higher at 7.8%, reflecting weaker revenue collections and higher spending related to the COVID-19 stimulus package.

We forecast the budget deficit to remain at 7.8% of GDP in FY21, higher than the authorities' projection of 6%, driven by continued spending on economic recovery as part of the stimulus package (around 4% of GDP over FY20 and FY21) and weak revenue performance. Fiscal risks from contingent liabilities have increased due to the economic fallout on state-owned enterprises (SOEs) and a weak banking sector.

Bangladesh's low government revenue-GDP ratio remains a key weakness in the fiscal profile. The official revenue-GDP ratio in FY19 was 10%, which is far below the 'BB' median of around 29%. Reforms such as the introduction of a new value-added-tax (VAT) law from July 2019 have not been successful in raising the revenue ratios so far. Bangladesh's government debt-GDP ratio of 40.3% in FY20 is still low compared with the 'BB' median of 59.9%, but the debt-revenue ratio at 438.6% in FY20 was far above the 'BB' median of 245.4%. A high proportion (almost 50%) of external debt is concessional, thus mitigating refinancing risks and reining in debt-servicing costs.

Bangladesh's banking sector health and governance standards remain weak, particularly in public-sector banks. The gross non-performing loan (NPL) ratio remained high at around 9% in June 2020, as against 11.2% a year ago. The NPL ratio of the state-owned banks is significantly higher (20%). State-owned banks account for around 30% of the total banking sector's assets, thus creating the risk of contingent liabilities for the sovereign. According to the IMF, published NPL ratios grossly underestimate the NPL problem in the banking sector, and we expect NPL ratios to rise further. The overall capital adequacy ratio of the banking sector is also low, at 11.6%.

Bangladesh's structural indicators remain a weakness relative to peers. In addition to weaker governance indicators, the country's ranking on the Ease of Doing Business Index is the lowest in the 'BB' category. Foreign direct investment remains constrained by large infrastructure gaps, although the government's focus on building large infrastructure projects in the next few years could bode well for investment. The security situation in Bangladesh has improved in recent years and is less of concern to foreign visitors now, however the recurrence of security incidents and political turmoil remains a significant political risk.

ESG - Governance: Bangladesh has an ESG Relevance Score (RS) of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Bangladesh has a low WBGI ranking at the 21st percentile, reflecting the absence of a recent record of peaceful political transitions, relatively limited rights for participation in the political process, weak institutional capacity, uneven application of the rule of law, and a high level of corruption.

RATING SENSITIVITIES

The main factors that individually, or collectively, could trigger positive rating action are:

- Public Finances: Increased confidence in Bangladesh's capacity to deliver fiscal consolidation and debt stabilisation over the medium term, for example through sustained improvement in the structure of public finances in terms of a higher revenue base and lower contingent liabilities

- Structural: Significant improvement in the health of the banking sector and structural indicators, for example in terms of governance standards including political stability, control of corruption and regulatory quality.

The main factors that individually, or collectively, could trigger negative rating action are:

- Public Finances: Failure to stabilize government debt over the medium term, for example due to the absence of structural improvements in public finances or the crystallisation of contingent liabilities related to banks or other SOEs

- External Finances: Rapid weakening of external finances, for example through a sustained widening of the current account deficit or a significant decline in FX reserves

- Macro: Weaker medium-term growth prospects, for example caused by lower remittances, a lasting impact from the COVID-19 pandemic on key sectors of the economy such as RMG, or deterioration in internal security.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

���������ֳ�'s proprietary SRM assigns Bangladesh a score equivalent to a rating of 'BB' on the Long-Term Foreign-Currency (LT FC) IDR scale.

���������ֳ�'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 weak governance hindering the strength and effectiveness of economic policy, weak governance, the health of Bangladesh's banking sector, and a challenging business environment because of red tape, polarised political settings and domestic security issues.

���������ֳ�'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 LT FC IDR. ���������ֳ�'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.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [/site/re/10111579].

Key Assumptions

The global economy performs in line with ���������ֳ�'s September 2020 Global Economic Outlook.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Bangladesh has an ESG Relevance Score of 5 for Political Stability and Rights, as World Bank Governance Indicators have the highest weight in ���������ֳ�'s SRM - and are therefore highly relevant to the rating and a key rating driver with a high weight.

Bangladesh has an ESG Relevance Score of 5 for Rule of Law, Institutional & Regulatory Quality and Control of Corruption, as World Bank Governance Indicators have the highest weight in ���������ֳ�'s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.

Bangladesh has an ESG Relevance Score of 4 for Human Rights and Political Freedoms, as the Voice and Accountability pillar of the World Bank Governance Indicators is relevant to the rating and a rating driver.

Bangladesh has an ESG Relevance Score of 4 for Creditor Rights, as willingness to service and repay debt is relevant to the rating and is a rating driver for Bangladesh, as for all sovereigns.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on ���������ֳ�'s ESG Relevance Scores, visit .

Additional information is available on

Applicable Models

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).

• Country Ceiling Model, v1.7.1 (1)
• Debt Dynamics Model, v1.2.0 (1)
• Macro-Prudential Indicator Model, v1.5.0 (1)
• Sovereign Rating Model, v3.12.1 (1)

Additional Disclosures

• Dodd-Frank Rating Information Disclosure Form
• Solicitation Status
• Endorsement Policy

Endorsement Status