Moody's credit rating downgrade: What does it mean for Bangladesh?

Moody's downgraded Bangladesh's rating for the first time on Tuesday, placing it at B1 from the previous Ba3 category. The latest assessment came due to heightening external vulnerability and liquidity risks amid deterioration in forex reserve, which indicates continued pressure on Bangladesh's external position, exacerbating imports constraints, and, as a result, energy shortages.

The multiple exchange rate regimes and the lending rate cap also came in consideration of the country's downgrade. The Business Standard reached out to four experts to understand how the downgrade from Ba3 to B1 could impact the country's economy.

'The immediate impact will be on trade financing'

Dr Zahid Hussain, Former Lead Economist, World Bank Dhaka Office

From the explanation they gave for the downgrade, it seems there are three main reasons. The first one is what they labeled as unconventional policies. I think they meant two things by that, one being the multiple exchange rate cap which started from last September. The other thing is the interest rate cap, which was implemented in 2020. 

Although they did not change their rating back then, they have now, because they took into consideration the fact that even during this distressing time, when inflation is on the rise, the interest cap has not been touched. So, even though they didn't consider it a big issue back then, our inability to use the interest rate to handle the crisis worked as a factor here.

The second reason I think is the institutional weaknesses that were revealed during this crisis. Institutional weakness in Bangladesh is nothing new, in fact it is quite common in developing countries, but what they are implying is that some new institutional weaknesses have come to the fore. I think they are referring to the autonomy of Bangladesh Bank. Bangladesh bank is not functioning independently, or not being able to function independently, however you phrase it. 

Besides, other institutions – including the finance division, financial institutions division, general economy division – who are in charge of macro management, have also shown some major weaknesses in the way they have handled the crisis.

The third I believe is the unpredictability of policy. What the policy response will be, and when it will come, is quite random, quite ad hoc. Sometimes, I am putting in mechanisms to control, say for example the price of sugar, sometimes I am removing it arbitrarily. They come and go, but what policy is being implemented for what reason is unclear. Whether the intended result, or unintended consequences is having an impact on the policy change, has not been evident in recent times. This is my personal observation, but I think that is what they mean when they say unpredictable policies.

Last year, they downgraded the financial sector outlook based on the weaknesses of the financial sector, but this time they lowered the overall sovereign rating. This is indeed a cause for concern. Firstly, it gets a lot of attention in the global financial community, which leads to an image crisis. 

There is also an immediate impact on trade financing cost. Take the financing instruments we depend on when importing - the most popular of those is Usance Payable At Sight (UPAS), which is a very short term loan, which is used to finance the importer. Before LC settlement, if your supplier wants the money, you can give it to them through the UPAS scheme. When deciding the interest rate of UPAS one fact taken into consideration is the country's risk premium, which is decided based on country rating. Everyone does not use Moody's rating, but a lot of organisations do. 

Another thing is that the fee charged for LC confirmation may rise, since a risk premium is charged on this as well. The other issue will be a lot of people will lose interest in financing because of this not prime status; as it is rather risky. In that case, access to finance will be constricted. So, the immediate impact I think will be on trade financing as the interest goes up, confirmation fees go up and access becomes stricter.

Inflation and the dollar crisis are two blisters on our economy which need immediate surgical treatment. We need to address them, not just for this rating, but our economy in general. Addressing things like interest rate flexibility, market based foreign exchange rate, good governance in the financial sector, fiscal stability in the form of revenue mobilisation, revamping expenditure structure, are all orders of the day. The macroeconomic management as a whole needs to be improved. 

We need to move away from bureaucracy driven policies which operate on the basis of control and command, and move to market enabling policies. This will increase confidence in our economy. Another thing mentioned in the explanation of the downgrading is they think if private sector companies go for repayment, the government will interfere. We must move away from arbitrary governmental interference in the functioning of markets. There should be regulation, not inconsistent interference. The government should not arbitrarily say the exchange rate should be Tk108.

'It has already become a problem for all of our foreign partners' 

Syed Almas Kabir 

President, Bangladesh-Malaysia Chamber of Commerce and Industry

The credit rating agencies assess the situation at regular intervals. Our inflation rate is high at the moment, and we also have an issue with reserves at present – hence the downgrade in Moody's rating. By my understanding, this downgrade happened mainly because of these two reasons. 

Now, this obviously is a problem. Right now I am in Malaysia with a business delegation. I just had a meeting with a government agency here and they raised this issue in our meeting today. Since they raised this issue, it has already become a problem for all of our foreign partners. 

The businesses we have with Malaysia, there could be restrictions with regards to LCs. The international banks may rely less on our banks. As a result, the problem that we have in opening LCs may escalate. This may result in reduced trade. So, I am considering this as a big problem. 

Another long term problem is we often struggle with Bangladesh's image. When we talk about export and foreign direct investment, when such ratings drop, both FDI may reduce and our exports may also fall. Maybe we will not understand the impact of reduced investment overnight, but it will definitely slow down a bit. 

Another problem is our inward flow – remittance or FDI – may also reduce. 

What the government should do, I believe, is to ensure a single exchange rate. Everyone is concerned with our multiple exchange rates for currencies at the moment. Although I know the government is working on it, it should be fast-forwarded.  

Also, we have been talking about single digit interest rates from the businessmen's side for a long time, and the government has already taken a decision on it. Its implementation should also be ensured soon. But overall, inflation has to be tamed down as soon as possible. 

'We need to put effort to return to the previous rating'

Abul Kasem Khan

Former President, Dhaka Chamber of Commerce and Industry

Moody's, an international rating, is published for all the countries. Any downgrade in such a rating means that something is wrong. This is obviously a concerning issue for us. We should also look into how we can fix whatever has gone wrong, and take steps in the right direction so that our rating is not downgraded further. 

When we are marketing Bangladesh to someone, we say Bangladesh has this rating, which creates confidence. This rating allows major investors or lenders to evaluate risks in investing in Bangladesh. The higher your rating is, lower the risk. 

If you see Singapore, Hong Kong, or the first world countries, their ratings are very high. It means if you invest there, the risks associated with your investment or the process of the business is very clear. 

Bangladesh's ratings downgrade could possibly be associated with financial discipline and capabilities like import, export, and reserves. It could be that the rating has been downgraded considering all these aspects combined. 

Since this is an international rating, whether that be about investors or loans in the perspective of the private sector, lending rates may go up given the risks associated with it. Because risk-free ratings boost people's confidence in regards to investment and other issues. 

So I would say we should have put enough effort from our end to return to the previous rating. 

'Downgrading will risk long-term investment in megaprojects'

Shams Mahmud

President, Bangladesh Thai Chamber of Commerce and Industry 

Bangladesh is caught up in the current global economic headwinds with stronger greenback, global recessionary effects, and increasing geopolitical tensions because of the Ukraine-Russia standoff and US-China trade wars.

This  downgrading will risk long-term investment in megaprojects which are needed to ensure smooth transition post-LDC graduation. Already the private sector credit growth is shrinking as government borrowing is increasing from local sources. 

Besides the government, the private sector also needs massive investments for capacity building and value addition to face post-LDC challenges, especially in the face of free and preferential trade agreements. 

Due to the shortage of greenbacks in opening L/Cs, external sources of funds are now being taken. This will also now be under more scrutiny. Besides all of this, one major impact will be to any plans to raise capital from overseas by floating sovereign backed bonds, which is a normal practice to raise funds; this will be severely impacted.

The Business Standard feature writers Masum Billah and Nasif Tanjim interviewed the experts over the phone.