What the Moody’s ratings downgrade means for Bangladesh
Moody's has downgraded Bangladesh's long-term rating to B2 from B1, the second cut in two years, with a revised "negative" outlook—the first in 14 years. GDP growth forecasts for the current and next fiscal years have been reduced to 4.5% and 5.8%, respectively, citing political risks and slower growth. TBS consulted experts on the impact of this downgrade.
International credit ratings agency Moody's has lowered Bangladesh's long-term ratings to B2 from B1, marking the country's second consecutive downgrade in less than two years, while affirming its short-term ratings at "Not Prime". It also revised its outlook to "negative" from "stable" for the first time in 14 years. The agency has also revised Bangladesh's GDP growth forecast, lowering it to 4.5% from 6.3% for the current fiscal year and to 5.8% from 6% for the next, citing heightened political risks and lower growth. TBS spoke to experts to understand how this rating will affect Bangladesh.
Ratings downgrading is a temporary phase
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Dr Zahid Hussain, former lead economist, World Bank Dhaka office
The main impact of Moody's downgrading of Bangladesh's long-term ratings to B2 from B1 will fall on the banks during debt servicing — they will have to pay higher charges. Also, the country's risk premium for short-term loans will increase as well.
I think the Moody's report reflects the market conditions, which have persisted for a while. We have seen similar predictions in their previous reports as well. The downgrading was expected. So, I think the market has already taken it into account before the new report was released; and the traders are doing their calculations based on the prediction.
So, I do not think there will be any new impact. When there was no government for three days after 5 August, there was great uncertainty among the business community about the future. And it affected the rating.
When ratings are downgraded, it affects the confidence of investors. It has been going on for a while. Since the uncertainty has not gone away, it was lowered. But our economy is not in the dire need of foreign currency where it was a few years ago. Remittance flow has increased. So, we are hoping that the economy will recover soon.
The banks are able to open LCs, they are able to repay the short-term loans, one at a time. We are recovering. It will increase our reputation as a business-friendly country. So, I feel like it is mostly a temporary thing, and we will see the credit rating increase soon.
TBS' Shadique Mahbub Islam interviewed Dr Zahid Hussain over the phone.
Downgrading justified, but Bangladesh heading in right direction
Ferdaus Ara Begum, CEO, BUILD
Moody's downgrading of Bangladesh's rating from B1 to B2 is unfortunate, but the reasons they have outlined are justified.
There is a lot of political uncertainty right now. We do not know when the next elections will be and there is no clear roadmap for that. So the ranking they have given based on this is okay.
But the direction of transformation that we are heading towards right now is a good step. For instance, the Bangladesh Bank did not have autonomy for a long time, but that has been addressed now. The steps that the central bank has taken so far, such as the policy rate hike — though we are not seeing an effect on inflation right away — is the right move. The Bangladesh Bank governor is independently saying that it will take six to eight months to see the changes.
If we take these things into consideration, especially in terms of the exchange rate, which has reached a stable situation we can say that had there not been this transition, we do not know what situation we could have had to face.
So, in that respect, though the rating has been justifiably downgraded for the time being, we think this will improve in the medium term.
As for growth projection, we think that there was scope for exaggeration. In terms of GDP projected in the short term, there might be some downgrading. But we hope that if the interim government, especially some state bodies that are now functioning independently, can carry on like this, growth projection will also improve in the medium term.
TBS' Nasif Tanjim interviewed Ferdaus Ara Begum over the phone.
Economic troubles inherited from previous government still holding Bangladesh back
Mamun Rashid
Chairman, Financial Excellence Ltd and former CEO, Citibank NA
Moody's has stated the reason for this downgrade. Foreign investors like to see a roadmap for political transition. Yes, we need some reforms and to do some homework.
The target market for such ratings are international investors and people who assume risk exposure on Bangladesh's firms or Bangladesh itself, such as multinational banks and international donors. They want political clarity.
Policy tools have not worked here for a while due to inflation. The last policy tool was increasing interest rates, which caused two problems.
First, our consumption is decreasing. Poor people are prioritising necessary commodities. Should I buy rice, milk, or tea? Secondly, due to inflation, our purchasing power is shrinking, so international consumer goods companies are not being able to increase sales. Thirdly, even though the dollar crisis has somewhat been managed, many believe the dollar rate is managed. They want it to be even less managed.
Overall, some questions remain regarding Bangladesh's cross-border trade obligations and cross-border trade obligation settlements. Particularly, 11 banks, especially the S Alam ones, are lagging behind in cross-border trade obligation settlements. We have queries about the LCs of Social Islami Bank. The international investment community is also worried about liquidity.
The current issues plaguing the economy have been passed down from the previous government. You know that Dr Yunus has generated a lot of excitement. However, very recently, that excitement has dampened a little. On the other hand, dollar liquidity has improved, LCs are being settled after being stuck for a long time, and the e-return of income tax has created a positive buzz.
The negative things we inherited are still holding the economy back like a very heavy burden. Unless we can do something dramatic, there will be pressure. Even after receiving Tk7,000 crore, the situation of the 11 struggling banks has not improved much. So everybody is thinking, 'How deep is the hole?' So they want to see how we come out of the rain.
TBS' Nasif Tanjim interviewed Mamun Rashid over the phone.
