Moody's downgrade in the outlook of Bangladesh's banking system – the first time – may prove costly for the country's banking system, especially in securing funds from global lenders, hikes in interest rates and a fall in investor confidence, experts said.
Underscoring the significance of the downgrade, former Bangladesh Bank governor Salehuddin Ahmed said, "If this [the downgrade] were for a single bank, it wouldn't have been an issue. But we are talking about the country's entire banking system. Global lenders such as the International Monetary Fund [IMF] and World Bank [WB] will now be more cautious in providing funding.
"Besides, foreign investors may start thinking that business prospects here are not that good or there are problems in the management of the banking sector. We have trade with many different countries who will also take this matter very seriously."
He also said the interest rate of private foreign loans might also increase.
Stating that the situation may deteriorate further if authorities fail to take prompt measures, the former central bank governor said, "The country's foreign currency inflow is already low, and reserves are depleting fast. These need to be increased."
Asked what factors are considered while preparing a rating, he said, "The entire economic condition of a country, including the banking sector, investment opportunities and environment, and regulatory environment, among other factors are taken into account."
Asked what could be done immediately to resolve the crisis, Salehuddin said, "The Bangladesh Bank [BB] and the finance ministry are quite aware of what needs to be done in this regard to overcome this situation."
Zahid Hussain, the former lead economist of the World Bank's Dhaka office, commented that Bangladesh had been downgraded for the first time since the rating began.
He said, "After Atiur Rahman became the Bangladesh Bank governor, we went to institutions like Moody's for our rating, which was not there before. Even though we did not get the rating of investment grading, we were never downgraded. This is the first time ever."
Due to the downgrading, the interest rate of private foreign loans will increase and access to those loans may decrease, he told The Business Standard, adding that the international financial condition is now tight.
Bangladesh's reputation is already impaired due to Letter of Credit (LC) deferral or non-payment on time.
A downgrade will further complicate getting new private loans, he added.
When asked what Bangladesh should do in this situation, the economist said, "Our current account deficit has increased a lot. Condition of financial accounts is also not very favourable. Reserves are also decreasing. We have to improve those. Just talking won't work, we need to act."
Pointing out that more focus should be given to comply with the conditions of the IMF, he said the instalments of the ongoing programme of the IMF in Pakistan had been blocked because, in the six-month review, the lender found that Pakistan could not meet the conditions.
"In our case, the review will be around July. We have to ensure that we get the loan disbursement after the review," he said.
Quantitative Performance Criteria include key indicators like Net International Reserve, Primary Budget Deficit, Social Spending, Revenue Collection, and Capital Expenditure. If these can be maintained, then macroeconomic conditions are on track. These indicators are considered internationally as overall trademarks.
"This will help us even if the non-performing loan situation in the financial sector improves. We should also pay attention to financial stability indicators," he added.
Selim RF Hussain, chairman of the Association of Bankers Bangladesh (ABB) and managing director of Brac Bank said, the downgrade is a cause for concern as it will impact the cost of borrowing for banks and their ability to access capital markets.
"Bangladesh's external trade may become costlier following the recent downgrade of its banking system's outlook by Moody's," Hussain told TBS.
He warned that Bangladesh's reputation would be at stake, and corresponding banking would be costlier, increasing prices. He noted that the cost of corresponding banking in Pakistan is lower than that of Bangladesh.
The ABB chairman also said corresponding banks have already limited or restricted lending to Bangladesh.
Bangladesh's external trade was over $130 billion in FY22, and banks often have to borrow from foreign banks, extend payments, and confirm LCs (letters of credit) by foreign banks, which will become costlier. There are 62 banks in Bangladesh, and many face challenges, including high non-performing loans (NPL), provision shortfall, and poor governance.
The IMF has also recently tagged reforms in the banking sector with its $4.7 billion loan programme. The IMF has stressed the need to address the challenges faced by the banking sector in Bangladesh, including strengthening regulation and supervision, improving corporate governance, and addressing the issue of high NPLs.
Selim RF Hussain said the downgrade in the outlook of Bangladesh's banking system could also affect the confidence of investors, customers, and counterparties in the banking system, potentially leading to increased volatility in the financial markets.
Bangladesh needs to take urgent measures to reform its banking sector and address the challenges it faces to restore confidence and avoid further negative impacts on the economy, he added.
On 9 December 2022, Moody's Investors Service placed Bangladesh's long-term issuer and senior unsecured ratings at Ba3 on review for downgrade. The decision to place the ratings on review for downgrade was driven by Moody's assessment that Bangladesh's deteriorating external position raises external vulnerability and government liquidity risks in a way that may not be consistent with its current rating.