The US-based international credit rating agency, the Moody's on Monday lowered Bangladesh's long term credit rating from B1 to B2, citing lingering political uncertainty, deteriorating law and order and weak domestic demand. The B2 rating, classified as "highly speculative," signals significant credit risks, reflecting concerns over the country's economic stability and governance. This marks Bangladesh's second consecutive downgrade by Moody's in less than two years, although observers say it was not surprising given the massive political upheaval the country has gone through, widespread chaos that ensued and economic and financial sector mess that the new government inherited.
Moody's also revised Bangladesh's outlook to "negative" from stable - the first time in 14 years since the country began receiving ratings in 2010. This downgrade comes at a time when Bangladesh's economy is undergoing a range of reforms, from macro to micro levels, aimed at stabilising the banking sector, taming inflation and reviving the broader economy. The question that arises now is how will this downgrade affect the economic recovery, and what will be its implications for the country's investment climate, international trading and its standing in the development partners' eyes.
According to experts, the downgrade is expected to have limited immediate impact on the broader economy since the flow of private capital into Bangladesh is low by global standards. However, they warn that it will make international borrowing more expensive for both the government and private sector borrowers because loans will involve higher risk. Additionally, it will also affect international trade for banks, leading to higher costs for letters of credit (LCs) and more stringent reviews of private sector credit.
Dr. Zahid Hussain, former lead economist at the World Bank's Dhaka office, suggests that the primary impact will be felt by the banking sector, particularly in terms of debt servicing. "Banks will face higher charges, and the country's risk premium for short-term loans will increase," he explained.
While acknowledging the concern, experts remain cautiously optimistic about the outlook for Bangladesh's economy. They noted that the country's foreign currency situation is much more stable than in previous years as remittance flows have increased substantially and capital flight has stopped. Thus compared to a few years ago, the economy is in a much better position to recover.
International credit rating agencies evaluate factors such as a country's ability to repay debt, its reserves, and the allocation of funds to key sectors. They also consider various other elements such as political stability, governance standards, accountability, transparency, and levels of corruption. Essentially, the overall state of the country is factored into the rating process. These ratings are not only crucial for lending decisions but also serve as indicators of a country's economic health, both domestically and globally.
At present, one of the most pressing issues in Bangladesh is the political uncertainty in absence of a clear roadmap to election. Moody's report highlights the tense political situation that has dominated the country in recent months. While the interim government may have brought some stabilisation, the uncertainty surrounding the political landscape is far from resolved. There is no clear election roadmap, and the situation is further exacerbated by rising social unrest, weak law and order, and political and communal tensions - all of which increase the political risk attached to Bangladesh's creditworthiness.
In addition to credit rate downgrading, Moody's has also lowered Bangladesh's growth projections for the next two fiscal years, downgrading expected growth from 6.3 per cent to 4.5 per cent for FY2025, and from 6.0 per cent to 5.8 per cent for FY2026.
Earlier, the World Bank has also revised its GDP growth forecast for Bangladesh in the current fiscal year, 2024-25, lowering the projection to 4 per cent from the 5.2 per cent growth recorded in the previous year. This marks a significant shift from earlier projections, which anticipated a 5.7 per cent growth rate for 2024-25. The International Monetary Fund (IMF) has also adjusted its forecast, predicting a growth rate of just 4.5 per cent. The outlook is dampened by several factors such as weakening domestic demand, the ongoing disruptions in the garment sector, one of Bangladesh's key economic drivers, and the lingering impacts of natural disasters like flooding on agricultural production.
While many are quick to point fingers at the interim government for this downward trend, it is important to recognise the broader context and the legacy of wrong-headed economic policies under the previous administration. In fact, given the political upheaval and the ongoing instability in Bangladesh, some economists think it would not have been entirely surprising if the GDP growth had dipped into negative territory. In this light, the revised forecasts - though disappointing - can be seen as relatively optimistic.
Moreover, there is reason for being cautiously optimistic. Under the leadership of Dr Muhammad Yunus, the interim government is taking steps to implement key reforms aimed at stabilising the banking sector and reviving the broader economy. Thanks to Dr Yunus's personal reputation and international stature, the country is set to receive around $10 billion in foreign aid over the coming months. This influx of funds will significantly bolster Bangladesh's foreign exchange reserves, providing much-needed liquidity. Additionally, money market has been stabalised to a large extent so the dollar rate is stable, and the banking sector is undergoing a much-needed reform process. All of this will send out positive signal to foreign investors. If these positive trends continue, and the reform measures can be effectively implemented, there is high hope for a gradual economic recovery.
That said, the interim government is now 100 days old, but the chaos and confusion seem to be rising by the day. A prolonged social, labour, and political unrest undermine the business environment, erode investor confidence and hamper job creation. Instability will persist as long as job security remains uncertain. Many, therefore, think that the government must find a way to stabilise the political environment by putting forward a clear roadmap for free and fair elections.
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