The International credit rating agency-Moody's Investors Service (Moody's)-on Tuesday downgraded Bangladesh's long-term ratings to B1 from Ba3.
‘Moody's downgraded Bangladesh's long term issuer and senior unsecured ratings to B1 from Ba3 and affirmed short term issuer ratings at Not Prime,’ it said in a statement on Tuesday.
‘The rating outlook is stable.’
Bankers said that such downgrading would force local businesses to pay more to settle their global trades.
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.
Although there have been some improvements, the ongoing scarcity of dollars and the decline in foreign exchange reserves indicate sustained pressures on Bangladesh's external position. These pressures further exacerbate constraints on imports and subsequently lead to energy shortages.
Additionally, the government has not fully reversed its import control measures and unconventional policies, such as a multiple exchange rate regime and interest rate caps, and these policies create distortions in the economy and pose challenges to its stability, it said.
Furthermore, the very limited fiscal revenues in proportion to the size of the economy limit the government's flexibility in implementing policies, observed Moody's.
This situation also indicates a decline in debt affordability, as the depreciation of the taka and the short maturities of domestic debt lead to higher interest payments, it said.
While Moody's anticipates that external financing will provide some relief to external and fiscal indicators, the country's external buffers will still be weaker compared to pre-pandemic levels.
Moreover, the elevated levels of debt will diminish fiscal strength, especially as Moody's expects fiscal reforms will take a considerable amount of time to be implemented and yield results.
Simultaneously, Moody's has downgraded Bangladesh's local currency and foreign-currency ceilings to Ba2 and B1 from Ba1 and Ba3 respectively.
In Moody's assessment, Bangladesh's external position will remain structurally weaker than what was before the pandemic.
It expects that external financing will halt deterioration of foreign exchange reserves, which will stabilise during the next financial year 2024. Reserves, however, will not recover to pre-pandemic levels for the next 2-3 years.
The agency also speculates that the gross foreign exchange reserves will remain below $30 billion for the next two to three years, with net reserves likely lower following the Bangladesh Bank's commitment to the International Monetary Fund to start reporting reserves net assets such as the Export Development Fund.
Bangladesh's debt burden is considered moderate compared to its peers, and the country is expected to manage its external debt payments due to the concessional nature of the debt and long maturities.
Challenges such as low per capita income, limitations in infrastructure and human capital, low economic competitiveness, and a high concentration in certain sectors, however, pose constraints on economic growth compared.
The weak institutions and governance profile of Bangladesh are significant factors influencing its rating.
The country has a highly negative governance issuer profile score (G-4) indicating challenges in controlling corruption, upholding the rule of law, and limited credibility of legal structures, said Moody’s in its assessment.
