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6. April 2010 2 06 /04 /April /2010 23:04
S&P gives Bangladesh 'BB-' long-term rating
Access to foreign financial markets to be easier

FE Report

Bangladesh has got its first sovereign credit rating that has given it much needed access to foreign financial markets and made it a lucrative destination for foreign investors.

Global agency Standard & Poor's after analysing the macro and micro economic conditions of the country has issued it the rating 'BB-' for long term and 'B' for short term. It says the country's outlook is stable.

Upbeat finance minister AMA Muhith Tuesday at a press briefing said the government is satisfied with the rating as it reflects the economic parameters of the country.

The private sector will now get advantage in getting foreign loans and it will reduce import and export costs, he said.

"The rating also enables the government to raise low-cost capital in the overseas financial markets and further diversify its funding sources," he added.

Importers will be benefited as letter of credit confirmation and guarantee costs will be lower as the whole world now knows the economic condition of the country, Mr Muhith said.

The rating will give a strong signal to foreign investors to make decision about investing in Bangladesh, Mr Muhith explained.

"This rating will spark foreign investment, especially in power sector," he said.

The rating agency highlighted that the tax-GDP ratio is less than 10 per cent and domestic and external debts are relatively high, but the negative factor has been offset by strong economic growth, robust remittance, support of external donors and prudent macro-economic policies.

Increased investment and revenue will help the country get better rating in future, but slow tax earning and reduced external aid flow may hamper the rating prospect.

The S&P said, "We believe that Bangladesh's economy is largely free of macroeconomic imbalances in spite of its low income level, relatively narrow economic profile, and significant fiscal constraints."

Policy continuity and generally sound macroeconomic management have supported relatively strong growth, with per capita GDP rising at an average of 4.2 per cent annually in the past decade, it said.

The rating provides a strong vote of confidence in the future economic prospect, but it offers immediate benefit to the country foreign trade, Mr. Muhith said.

Bangladesh is grouped with 11 other countries with BB- rating and the country's performance is next to India in South Asia, Mr Muhith said adding, "Sri Lanka and Pakistan have lower rating than Bangladesh."

Bangladesh Bank governor Dr Atiur Rahman said resilient economy and strong performance of agriculture, industry and financial sector helped the country get better credit rating.

Rapid economic growth, significant build-up of foreign exchange reserves, strong commitment for economic reforms and current account surplus are the other reasons that put the country in higher ranking, he said.

Citibank NA country director in Bangladesh Mamun Rashid said the country has placed itself on the global rating map.

"It is universally accepted rating and it will remove any misunderstanding about the economic performance of Bangladesh," he explained.

Many international agencies time to time release different reports on Bangladesh and it will eliminate any confusion about the country, he said.

The rating will help the private sector float bonds in the international market or lend from international financial institutions at a lower cost, Mr Mamun said.

The cost of country risk for unrated Bangladesh is about two to three per cent and it is expected that the rate will reduce by 0.5 to 1.0 percentage points within 60 to 90 days, he said.

"Overall cost of cross-border borrowing will be significantly reduced after the announcement of the rating," he hoped.

Bangladesh has the same rating as Indonesia and the foreign lenders charge one to 2 per cent country risk for the East Asian country, he added.

"I started receiving queries from London and Hong Kong about the rating," said the country's top official of the US-based bank.

Vietnam also has the same rating, but it has negative outlook.

The government started the process to appoint international credit rating agencies four years ago to assess the economic performance of the country. Eventually the central bank had appointed S&P and Moody's to conduct the rating, which is expected to release its report soon.

"These strengths, combined with significant ongoing donor support, balance the vulnerabilities posed by the sovereign's relatively high public and external debt, significant fiscal constraints, and the low income levels," the global rating agency said.

It said Bangladesh's tax-to-GDP ratio, at 8.5 per cent, and total revenue to GDP of 11.8 per cent, are very low due to a combination of low tax compliance, administrative weaknesses, an agricultural sector that is largely free from taxation and, more broadly, the prevalence of tax exemptions and holidays.

The international agency said comprehensive revenue reforms that yield a durable rise in revenue generation will be needed to reduce the vulnerability of debt service burden and reliance on external donor support, and to finance higher public investment.

Public investment grew by just 2.9 per cent annually on average in the past decade, compared with nominal GDP growth of 13.2 per cent annually and hence, economic performance is increasingly constrained by the lack of adequate infrastructure.

The stable rating outlook reflects the expectations that a prudent macroeconomic policy-setting will prevail and microeconomic reforms to gradually address growth constraints will continue.

The ratings could improve if the government implements measures to expand the low revenue base and improve administrative and collection efficiency, leading to a material rise in its revenue.

The ratings could also be raised if rising investment leads to a sustainable increase in real GDP growth.

It, however, said the ratings could be lowered if fiscal slippages push the trajectory of government debt upward and if external donor support declines materially.
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