Moody's keeps long-term outlook stable, downgrades rating

The Moody's Investors Service downgraded Bangladesh's rating, but it keeps the country's long-term outlook stable, which indicates the rating agency does not anticipate any significant changes in the economy's creditworthiness or its ability to meet its financial obligations.

Moody's downgraded Bangladesh's rating for the first time, placing it at B1 from the Ba3 category.

The latest assessment came due to heightening external vulnerability and liquidity risks amid deterioration in foreign exchange 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 credit rating agency disclosed the new rating on Tuesday after concluding the review for downgrading from Ba3 that initiated in December last year.

In the assessment, the agency rated Bangladesh's long-term outlook stable.

The previous rating Ba3 refers to the bond rate given to debt instruments that are considered speculative in nature.

The global rating agency's latest downgrade came just two months after it downgraded the country's outlook on the banking system to negative from stable in March this year.

At a time when the country's banking sector has already been facing trouble in getting LC (Letter of Credit) confirmation from foreign lenders, the latest downgradation will only exacerbate the situation, raising import costs for importers and ultimately fuelling inflation further – already above 9%, said industry experts.

Reasons for downgrade

• Heightened external vulnerability, liquidity risks
• Scarcity of dollar, deterioration in foreign exchange reserve
• Import constraints, energy shortages
• Multiple exchange rate regime, interest rate caps
• Low level of fiscal revenues
• Possible impacts

The latest will rating will also intensify pressure on foreign exchange reserves as it will slow down foreign loan inflow due to a rise in costs, according to experts.

Zahid Hussain, the former lead economist of the World Bank's Dhaka office, told The Business Standard, "Because of our poor position in Moody's rating, our costs when dealing with foreign banks will increase. As our banks are not in good standing abroad, they cannot trust us very much. Already we have to pay more confirmation charges in opening LCs than many other neighbouring countries. This cost may increase due to further bad ratings."

Mentioning that Bangladesh's interest rate may increase in the case of foreign loans, he also said short- and medium-term foreign currency loans from abroad will also be costlier.

Commenting on the need to bring changes to exchange and lending rates, this economist said it was necessary to reform the cap of multiple exchange and lending rates in the country.

The dollar interbank market is now almost inactive and if the exchange rate was determined by taking that rate as the base rate, it would not actually be the market rate.

He also said there were discussions on pegging the rate of 182 days of treasury bills as base for the lending rate in next month's monetary policy.

Currently, the rate is 7% as developed by the central bank, so it cannot be called the market rate, Hussain said.

"I have heard the new lending rate will be announced by adding 3% to the base rate. The resulting rate can be up to 10%. That doesn't seem to be very effective either."

In the rating downgrade report, Moody's said, "Moody's assessment is that Bangladesh's heightened external vulnerability and liquidity risks are persistent, and that, together with institutional weaknesses uncovered during the ongoing crisis, the sovereign's credit profile is consistent with a B1 rating.

"Despite some easing, ongoing dollar scarcity and deterioration in foreign exchange reserves indicate continued pressures on Bangladesh's external position, exacerbating imports constraints and as a result energy shortages."

The report said, "The government has not yet fully reversed its import control measures and unconventional policies including a multiple exchange rate regime and interest rate caps, which are creating distortions."

"Finally, a very low level of fiscal revenues relative to the size of the economy constrain the government's policy choices and point to weakening debt affordability as higher interest payments result from the taka devaluation and short maturities for domestic debt."

Although Moody's expects external financing to help alleviate pressures on the external and fiscal metrics, external buffers will remain weaker than before the pandemic and higher debt levels will weaken fiscal strength, particularly as Moody's expects fiscal reforms will take years to materialise, according to the report.

Bangladesh's local-currency (LC) and foreign-currency (FC) ceilings have been lowered to Ba2 and B1 from Ba1 and Ba3, respectively. The LC ceiling is placed two notches above the sovereign rating, reflecting weak predictability and reliability of government institutions and high external imbalances, which raise risks for the garment export sector's contributions to government revenue; balanced by a relatively small government footprint.

Import cost will rise

• Interest rates of foreign loans will rise for private sector and govt
• Rise in cost of foreign loans will increase interest payment burden for govt
• Forex reserves will be under pressure

The FC ceiling is placed two notches below the LC ceiling, reflecting low capital account openness, weak policy effectiveness, and some degree of unpredictability surrounding capital flow management, but taking also into account a low external indebtedness.

Moody's external assessment also reflects in Bangladesh's external position as both current account balance and financial account both were in deficit, which is very risky for the country as reserve deteriorates fast when both accounts are in negative territory.

The current account deficit slightly narrowed in March to stand at $3.6 billion in the July-March period of FY23, down from $3.74 billion in July-February, according to the Bangladesh Bank's data.

Besides, the financial account deficit widened to $2.2 billion in July-March, up from $1.9 billion in July-February of the current fiscal year, as per central bank data.

In contrast, the financial account had a surplus of $12 billion in the July-March period of the previous fiscal year.