Moody's downgrade ratings require rethink: BB rebuttal

Downgrade ratings of Bangladesh by Moody's didn't appropriately reflect the positive changes in the political and economic areas following the mass uprising, says central-bank rebuttal that also requests a rethink.
In a statement, the Bangladesh Bank (BB) said the New York-based global ratings agency recently downgraded the ratings for Bangladesh from B1 to B2 and affirmed the short-term issuer ratings as Not Prime. The outlook has also been changed to negative from stable. In explaining the downgrade, Moody's mentioned heightened political risks and the possibilities for lower economic growth.
"Bangladesh Bank (BB) is, however, of the view that the recent ratings do not appropriately reflect the positive changes that happened in the political and economic areas following the mass uprising that led to the installation of an Interim Government led by Nobel laureate Professor Muhammad Yunus."
In July 2024, it reminds, Bangladesh underwent a historic political transformation, driven by a student-led uprising and widespread public support. The new interim government formed in August 2024 with the backing of student-led mass movement and support from all major political parties has initiated fundamental reforms in key areas, including the economy, law and order, anticorruption measures, democratic/election processes and public administration.
To tackle economic and financial challenges, according to the statement, the BB has implemented a comprehensive set of measures. These include constitution of 3 task-forces with a view to undertaking and implementing a comprehensive asset-quality review of bank assets leading to a comprehensive banking-sector reform programme, strengthening and refocusing the operations of BB, and pursuing stolen- asset recovery at home and abroad.
Simultaneously, the government established a national taskforce to re-strategise the economy and mobilise resources for equitable and sustainable development. These task forces have already commenced activities, engaging in extensive consultations with relevant stakeholders.
The initiatives are also being supported by international development partners, including the World Bank, the Asian Development Bank, the UK government, the US Treasury and internationally recognized Bangladeshi experts, it mentions.
It says the primary goal of this inclusive approach is to avoid any misstep in the reforms being undertaken by the interim government. The government is committed to prioritizing and implementing reforms to lay a solid foundation for enhancing the country's long-term sustainable growth and more equitable social-development objectives.
"While these activities may not yield immediate economic benefits, they are paving a clear path toward strong economic recovery and social progress," the central bank says in the response.
Notable success has been achieved in stabilizing the external-sector indicators. Since August 2024, the exchange rate has remained stable at around BDT 120 per American dollar, supported by an ongoing surge in remittances and export earnings. During the first 4 months (July-October), the external current account has improved from a large deficit to a virtual balance, the financial account also strengthened from a net position of large outflows to a net position of sizable inflows, and the overall balance improved by more than one billion dollars, it adds.
Also, BB has refrained from selling dollars, and foreign-exchange reserves have stabilized around USD 19 billion (based on the BPM6) during this period. It also requires special mention that the outstanding payments arrears of $ 2.5 billion as of mid- August-accumulated over the last two years by the previous government-have been reduced to about $ 450 million over the 3-month period.
"These positive outcomes indicate that external-sector vulnerabilities have been addressed, and further improvements are expected with continued strong remittance inflows and sustained export earnings, backed by BB's prudent policies."
The BB response further mentions the financial sector has been burdened with the legacy of serious mismanagement and state-sponsored siphoning of bank deposits by certain families/groups with support from the previous administration. BB acted decisively by replacing the boards of directors in 11 banks.
Operational activities, liquidity management and performance of these banks are now being monitored daily, leading to early signs of stabilisation in these banks. BB has provided guarantees to cash-surplus banks, enabling them to extend liquidity support to liquidity-shortage banks. This has positively impacted liquidity management of weaker banks, eliminating the need for BB to inject high-powered money, it says.
The largest of these banks, the Islami Bank Bangladesh PLC, has already earned the confidence of its customers and registering sizable positive cash-flow and remittance growth, and thus it is not likely to require further liquidity support from other banks. Some other banks are also moving in that direction with restored customer confidence.
It reaffirms that BB is fully committed to resolving the lingering liquidity problem in a few other banks and is working on a comprehensive bank resolution strategy being developed with support from the IMF, World Bank and the US Treasury. "We firmly believe that there is no systemic risk to the banking system and there will be no contagion effect. The risk of a banking-sector crisis-which emerged under the previous government-has been largely mitigated.
"Though the banking-sector indicators do not show noticeable improvement yet, we expect a positive turnaround in the near future."
Controlling inflation remains a top priority for policymakers. BB has tightened the monetary-policy stance through abandoning the policy of fixing the interest rates and letting them be determined freely by market forces, contributing to a sharp increase in the whole interest rate structure; refraining from printing new money to finance the fiscal deficit; increasing the Policy Rate in three equal monthly steps from 8.5 per cent to 10 per cent in October; and undertaking credible measures to cut significantly the fiscal deficit and domestic borrowing requirements for budget financing.
"The government believes that all necessary demand-and supply-side measures are currently in place, and we must allow the necessary time for the transmission mechanisms to work and bring down inflation in a sustainable manner to the target range of 5-6 per cent," it says.
The economy is undergoing a major transformation and it will take more time for the positive impacts of various government actions to fully materialize. Domestic political support for financial-sector reforms and strong support from international partners underpin the prospects for further momentum to economic recovery.
"Against this background, we are of the view that the change of sovereign ratings by Moody's is tantamount to "looking through the rearview mirror" while the car is moving forward.
We hope that Moody's will soon undertake a more comprehensive assessment of Bangladesh economy after visiting Bangladesh and get firsthand experience by consulting the relevant stakeholders and experienced economic observers," the response reads.

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