Global credit rating agency Fitch has rated Bangladesh with a "stable outlook" for 2020 but warned about a downside risk of the country's rising remittances – terming the growth "temporary" – and an uncertainty over exports.
In its ratings released on Wednesday, Fitch addressed various economic challenges for Bangladesh, including higher degree of uncertainty in achieving expected GDP growth, a rise in budget deficit amid a poor revenue collection, and a further rise in default loans.
Despite various challenges arising out of the Covid-19 pandemic, only the strong position of foreign exchange reserves – which crossed $40 billion – has helped Bangladesh retain its stable outlook rating.
Addressing the remittance issue, Fitch said remittance is an important driver of household consumption and accounts for about 6% of the GDP. It has surprisingly been resilient, supporting private consumption.
Remittances grew by nearly 17% year-on-year during the January-October period in 2020.
"We think this rise is temporary. Factors such as workers repatriating their savings before returning home and also a shift towards more formal remittance channels, supported by the Bangladesh Bank's 2% cash incentive, contributed partly to the rise in remittances," the global credit rating agency said.
Expressing concerns about exports, Fitch said 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 owing to the US-China trade disputes.
Bangladesh's readymade garment sector, which accounts for 80% of total export earnings, raked in $27.9 billion in FY20, down from $34.1 billion in FY19, as demand from key markets, such as the European Union (62%) and the United States (18%), has fallen.
According to official statistics, the economy slowed significantly to 5.2% in FY20 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."
Fitch also projected 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 and a weak banking sector.
The authorities' FY20 revised budget deficit now stands at 5.3% of GDP, up from 4.8%.
Fitch sees a high risk of rising default loans further, which the government brought down to single digit in December last year by relaxing loan rescheduling policy.
Citing the International Monetary Fund's (IMF) observation, Fitch said, "The published non-performing loan (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 banking sector health and governance standards remain weak, particularly in public-sector banks.
The gross NPL ratio remained high at around 9% in June 2020 against 11.2% a year ago. The NPL ratio of the state-owned banks is significantly higher at 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 Fitch.
Strength of Bangladesh
Bangladesh has strengthened its external buffers despite the Covid-19 shock. According to the latest data, international reserves increased to about $40 billion from about $33 billion at end-2019, reflecting lower imports, higher remittances, and increased borrowing from multilaterals.
"We estimate foreign exchange reserve coverage of current external payments to remain healthy at 8.6 months by end-2020," Fitch says.
"We believe that the Bangladesh Bank will maintain its policy stance for a stable and competitive exchange rate through foreign exchange intervention. Forex 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. Fitch forecasts the external debt service to be manageable in 2021 and 2022 at around 4% of current external receipts.
The IMF has approved $244 million under the Rapid Credit Facility and $488 million under the Rapid Financing Instrument.
Bangladesh has also received support from the World Bank and the Asian Development Bank to fund Covid-19-related expenditure.