Fitch forecasts 7pc GDP growth
Global credit ratings agency Fitch said Bangladesh's economy would grow 7 per cent in the current fiscal year, powered by declining coronavirus infections and easing of supply chain disruptions.
The agency is more bullish about the growth potential of the country compared to many other international organisations.
The International Monetary Fund has forecast 6.5 per cent gross domestic product growth for 2021-22, while the World Bank estimates the economy will expand by 6.4 per cent and the Asian Development Bank by 6.8 per cent.
The government has targeted a 7.2 per cent growth in FY22 as the economy recovers from the coronavirus pandemic.
In its latest outlook released on Monday, Fitch affirmed "BB-" long-term foreign-currency issuer default rating with a stable outlook for Bangladesh.
The rating reflects Bangladesh's resilient external finances, relatively strong growth despite the pandemic and government debt levels that are below the peer median, against low government revenues, and weak governance indicators and the banking sector, said Fitch.
The agency believes the large year-on-year increase in remittance flow in 2020 is unlikely to be repeated as some of the factors that drove the big jump were temporary.
Remittances reached a record high of $21.7 billion in 2020, driven by a shift to more formal remittance channels and the Bangladesh Bank's 2 per cent cash incentive for inward remittances.
Growth in remittances has slowed this year, reaching $18.9 billion by October. Authorities have indicated that the incentive is likely to remain in place.
Bangladesh's foreign exchange (FX) reserves increased to about $46 billion by the end of September 2021, from $43 billion in 2020, due to the higher remittance flow, increased external borrowings primarily for Covid-19 relief, and a pick-up in exports.
"We believe the Bangladesh Bank will maintain its policy stance for a stable and competitive exchange rate through FX intervention."
FX reserves, however, 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, it said.
Fitch estimated the FY21 budget deficit at 5.8 per cent of GDP, slightly above the 5.7 per cent forecast made for the countries with a similar rating. The government has forecast a budget deficit of about 6.2 per cent of GDP in FY22.
"We expect spending on Covid-19 relief measures to continue until FY22 and withdrawn from FY23."
Risks to the forecasts remain if the economic recovery is weaker than the authorities' expectations or due to the extension of support measures, Fitch warned.
"Fiscal risks from contingent liabilities have increased due to the economic fallout of the pandemic on state-owned enterprises and forbearance measures still in place for the banking sector."
Bangladesh's low government revenue-to-GDP ratio remains a key weakness in the sovereign's credit profile. The official revenue-to-GDP ratio in FY20 was 9.8 per cent, a fraction of the 'BB' median of around 28 per cent.
Introduction of a new VAT law from July 2019 has not been effective in raising the revenue ratio so far, the rating agency said.
It says the health of Bangladesh's banking sector and its governance standards remain weak, especially among public-sector banks.
The gross non-performing loan ratio rose modestly to 8.2 per cent by June 2021 from 7.7 per cent at end-2020, but the reported figure is likely understated because of an extensive loan moratorium.
State-owned commercial banks' NPL ratio of 20.6 per cent is substantially higher than private-sector banks' 5.4 per cent.
"But we expect both to rise significantly when repayment relief is withdrawn next year, provided it is not extended again," said Fitch.
Bangladesh's structural indicators remain a weakness relative to its peers, according to the agency.
"In addition to weaker governance indicators, 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 now less of a concern to foreign visitors, although the risk of a recurrence of security incidents and political turmoil remains."
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