Moody's downgrades Bangladesh's rating to B1, says outlook stable

Moody's Investors Service has downgraded Bangladesh government’s long term issuer and senior unsecured ratings to B1 from Ba3 following a review initiated about six months ago.

In a statement on Tuesday, the credit rating agency affirmed short term issuer ratings of the government at Not Prime, reports Reuters.

“The rating outlook is stable,” the agency added.

However, the agency’s assessment is that Bangladesh's heightened external vulnerability and liquidity risks are persistent.

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.

Meanwhile, 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, Moody’s said, 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.

Concurrently, Bangladesh's local-currency and foreign-currency 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. 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.

In Moody's assessment, Bangladesh's external position will remain structurally weaker than before the pandemic.

It expects external financing will halt the deterioration of foreign exchange reserves, which will stabilise during the next fiscal year ending June 2024.

“However, reserves will not recover to pre-pandemic levels for the next 2-3 years.”