OREANDA-NEWS. Fitch Ratings has affirmed Bangladesh's Long-Term Foreign- and Local-Currency Issuer Default Ratings at 'BB-'. The Outlooks on the Long-Term IDRs are Stable. The Country Ceiling is affirmed at 'BB-' and the Short-Term Foreign-Currency IDR at 'B'.

KEY RATING DRIVERS

Bangladesh's rating balances high, stable real GDP growth and persistently strong foreign-currency earnings from remittances and garment exports, against weak structural features, most prominently significant political and banking-sector risk. More specifically, the ratings reflect the following key rating drivers:

- Bangladesh's real GDP growth is high at a five-year average of 6.3% compared with the 'BB' category median of 4.3%. GDP growth has been remarkably stable over the years when Bangladesh was hit by both political turmoil and natural disasters. The severe political turmoil in the first quarter of 2015, in which more than 100 people were killed, had a relatively small impact on the official GDP data. Fitch expects growth to reach 6.5% in the financial year to 30 June 2016 (FY16) and FY17.

- Strong political polarisation is negative for Bangladesh's credit profile. Normalcy has returned to the streets for now, but after two consecutive years marked by months of severe political violence, blockades and general strikes, a recurrence or escalation cannot be ruled out. The main risk to the sovereign credit profile is that the political turmoil would deter foreign investors and buyers, especially of ready-made garments, from doing business in Bangladesh, thereby inflicting long-term harm to the economy.

- Bangladesh scores poorly on a broad range of governance indicators, including the World Bank governance indicator (21st percentile versus the 'BB' median of 46th percentile). The general level of development remains low, as illustrated by weak United Nations human development indicators. Bangladesh reached the World Bank's lower middle-income status in July 2015, but GDP per capita of USD1,297 remains well below the 'BB' peer category median of USD4,473.

- The government's revenue intake of 10.8% of GDP is the lowest of all rated countries with the exception of Nigeria, implying limited fiscal space for capital expenditures. The general government debt level of 34.7% of GDP compares well with the 'BB' median of 41.6%. However, the budget deficit of 5.0% is higher than the 'BB' median of 3.6%, and since planned consolidation is limited, government debt is likely to slightly rise in the coming years.

- Exports of ready-made garments and remittances from overseas workers form the two main pillars of Bangladesh's economy, ensuring high growth and comfortable external balances. On the one hand, this shows the comparative advantage of Bangladesh's large, unskilled population. On the other hand, limited diversification implies a risk in case the ready-made garment sector or remittances face an external shock. The current account deteriorated somewhat and flipped from surplus into a deficit in 2014 (-0.9% for the calendar year) as a result of strong non-oil imports and slowing external demand.

- The business climate can generally be characterised as difficult (Bangladesh ranks 173 out of 189 countries for the World Bank Ease of Doing Business indicator). The Extended Credit Facility arrangement with the International Monetary Fund (IMF) supported implementation of reforms such as establishment of internal controls and compliance, and full automation of financial reporting in the state-owned banks. It also seemed instrumental in ensuring progress in implementation of the new VAT by July 2016 and an audit of Bangladesh Petroleum Corporation. Completing the IMF arrangement, which was recently extended by three months to end-October 2015, would improve the authorities' track record after the programme went off track for a number of months.

- The banking sector is vulnerable to shocks, as both asset quality and governance are weak, especially in state-owned banks. The gross non-performing loans ratio of the sector increased to 10.5% in 1Q15 from 9.7% in 4Q14. Bangladesh Bank seems committed to strengthen the poor governance in the banking sector.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are well balanced.

The main factors that individually, or collectively, could trigger positive rating action are:
- Sustained stronger real GDP growth, which would bring GDP per capita more in line with peers; this could be, for instance, supported by a political environment that is more conducive for economic activity
- An improvement in governance, which would strengthen the business climate and could improve the health of the banking sector

The main factors that individually, or collectively, could trigger negative rating action are:
- Protracted substantial disruption of economic activity as a result of materialising political risk
- Greater-than-expected deterioration in the banking sector's asset quality, prompting substantial government support, or other developments that would cause public finances to deteriorate to such an extent that it would lead to a significant rise in the government debt-to-GDP ratio

KEY ASSUMPTIONS

- Both Bangladesh's ready-made garment exports and remittances from workers abroad continue to be strong, supporting Bangladesh's growth model and external finances.
- The global economy performs broadly in line with Fitch's Global Economic Outlook, including a pick-up in world GDP growth from 2.5% in 2015 to 2.9% in 2016 and 2.8% in 2017.