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The Financial Express

Fitch sees strong growth prospects for Bangladesh, stabilising forex reserves

| Updated: September 30, 2022 19:09:27


Fitch sees strong growth prospects for Bangladesh, stabilising forex reserves

Despite the global economic headwinds and growing inflationary pressures at home, Bangladesh maintains strong growth prospects and a manageable external debt repayment profile, according to Fitch Ratings, a leading multinational credit ratings agency, bdnews24.com reports.

In its latest assessment of Bangladesh's creditworthiness, Fitch once again assigned it a 'BB-' rating. The rating indicates an elevated vulnerability to default risk, but also notes that there is business or financial flexibility to support the servicing of financial commitments.

The South Asian nation is looking to shake off the lingering effects of the pandemic while simultaneously grappling with the fallout from the war in Ukraine, which have seen consumer prices shoot up.

In light of the destabilising impact of the war on the global energy market, the government hiked fuel prices by as much as 50 percent, with the country's foreign exchange reserve also coming under strain, compounded by the devaluation of the taka against the US dollar.

In a bid to rein in inflation, which hit a 9-year-high in June, the central bank on Thursday raised its key interest rate, or repurchase agreement rate, by 25 basis points to 5.75 percent for the second time in just three months. It also raised the rate on trade financing in foreign currency to ease the pressure on the forex reserves.

According to Fitch, Bangladesh can navigate the challenges posed by the Ukraine war and rising global interest rates with greater exchange-rate flexibility and support from external official creditors.

Although the forex reserves fell 16 per cent to $38.9 billion in an eight-month period during the last fiscal year, the pressure on the reserves is likely to ease in light of policy measures to curb imports, a hike in fuel prices and greater exchange-rate flexibility, it said.

Fitch expects the forex reserves to level out in FY23, averaging $34 billion which is enough to pay off over four months worth of import bills. It also expects the current-account deficit to narrow to 3.0 per cent of the GDP in 2023 and 2.3 per cent in 2024.

Fitch forecasts economic growth to slow down to 5.0 per cent in FY23, citing the temporary measures to contain imports and curb electricity consumption. However, it expects growth to rise to 6.4 per cent once these measures are lifted and commodity prices are contained.

Bangladesh has also been in talks with the International Monetary Fund for $4.5 billion in financing to fund implement climate change resilience projects and to shore up the government’s budget. Although the country faces refinancing stress in the near term, Fitch believes an IMF programme could support its external position and benefit policy credibility.

However, Fitch flagged low government revenue, low per capita income, a weak banking sector and deficient governance indicators are causes for concern.

The general tax-GDP ratio, at 9.8 per cent in FY22, is a key credit weakness and much below the 27.3 per cent 'BB' median, it said, adding that the budget deficit may slightly exceed the government's target.

It also raised questions about the health of Bangladesh's banking sector and governance standards, describing them as 'weak'. It noted non-performing loan ratio of state-owned commercial banks, at 20.0 per cent, is substantially higher than the 5.8 per cent of private-sector banks and could rise further once forbearance measures are withdrawn. "Bank capitalisation is thin relative to prevailing market risks and we believe the banking sector could be a source of contingent liability for the sovereign if credit stress intensifies."

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