American agency S&P has relegated Bangladesh's long-term creditworthiness ratings to "B+" from "BB-" on grounds of elevated external vulnerabilities coupled with latest domestic sociopolitical situations.
The US global credit-rating agency lists the downside risks and says Bangladesh's external profile remains under pressure. It specifies reasons for downgrading like depleting foreign-exchange reserves, unfavourable balance of payments and rising debt service.
In its ratings report released Tuesday S&P notes that Bangladesh has been facing its forex-market volatility since the beginning of the war in Ukraine. Later, it tightened imports to curb the demand for foreign exchange.
Bangladesh is also taking loan from the International Monetary Fund or IMF worth US$4.7 billion to avert further volatility on the forex market.
The S&P Global notes a high interest-expense ratio and a narrowing but still relatively large budget deficit will continue to weigh on fiscal assessment.
"We lowered our long-term sovereign credit ratings on Bangladesh to "B+" from "BB-"and affirmed our "B" short-term ratings. The outlook is stable," S&P said in a press release.
According to the S&P assessment, the downgrade reflects persistent pressure on Bangladesh's external metrics, particularly a continued decline in foreign-exchange reserves.
The country's outlook is stable, reflecting S&P's view that its per-capita real growth rate will remain very strong compared to peers, the ratings agency opines.
In May, Fitch downgraded Bangladesh to "B+" from "BB- due to a sustained weakening of external buffers that could likely prove challenging to reverse, despite recent policy reforms.
"We could raise our ratings on Bangladesh if it materially improves its external metrics. That improvement would likely be indicated by current-account receipts or foreign-exchange reserves rising substantially beyond our forecasts, such that gross external-financing needs remain lower than 100 per cent of current-account receipts plus usable reserves on a sustained basis," S&P Global says.
Bangladesh's highly concentrated political landscape may constrain the effectiveness of its institutions and limit checks and balances on its government.
As high inflation, rising domestic interest rates, limited access to foreign exchange, and policies aimed at compressing imports continue to bite, domestic demand will likely remain modest in comparison to the long-term trend, it notes.
These soft conditions are likely to persist for the remainder of calendar 2024, with recovery set to take shape from 2025 onward.
Economists say as the other rating agencies also downgraded the country, so the market is already witnessing its pains.
"Moody's also downgraded Bangladesh. So Bangladesh is passing through the pains of the downgrading," says Dr Ahsan H. Mansur, executive director of the Policy Research Institute of Bangladesh.
Focusing on the political front, the S&P points out that the government faces little opposition in parliament, which limits checks and balances.
"Foreign direct investment has remained persistently low, possibly reflecting the country's evolving institutional settings, infrastructure deficiencies, and bureaucratic inefficiencies."
Bangladesh is also currently grappling with widespread student-led protests that have reportedly led to more than 200 deaths, according to local news sources.
The protests arose after a lower court reinstated a system of quotas for civil- service jobs. In response to the protests, the government imposed a telecommunications blackout and nationwide curfew. On July 21, the supreme court scaled back most of the quotas.
Also noted are financial constraints, like interest-expense burden is elevated, especially relative to government's meagre revenue collection.
Bangladesh relies entirely on official bilateral and multilateral partners for its foreign-currency borrowing, which partially mitigates risks to its debt profile.
The latest data show that gross reserves, measured on a BPM6 basis, stood at US$21.8 billion as of end-June 2024. This is 35-percent lower than the figure in June 2022, and enough to cover only about 3.3 months of current-account payments.
Domestic inflation is elevated, and well above the central bank's target with headline inflation at 9.7 per cent in June 2024.
jasimharoon@yahoo.com