Moody's downgrades BD ratings to B2, outlook to negative

Bangladesh's long-term issuer and senior unsecured ratings have been downgraded to B2 from B1 and future outlook to negative by Moody's largely for reasons that include political-changeover unrest and past directed fund awarding.
The country's outlook has been changed to negative from stable, according to the global ratings agency's report launched Monday.
It says the downgrade reflects heightened political risks and lower growth, which increases government liquidity risks, external vulnerabilities and banking-sector risks, following the recent political and social unrest that led to a change in government.
"Ongoing political uncertainty and weakening growth lead Bangladesh to rely increasingly on short-term domestic debt to finance its deficit, raising liquidity risks," says the report released by the New York (US)-headquartered agency from Singapore.
Additionally, higher risks to asset quality amplify structurally weak capital and liquidity in the banking system, increasing contingent liability risks for the sovereign.

According to Moody's view, despite improving remittance flows and loan disbursements from development partners, external vulnerability risk remains due to a sustained decline in the reserves buffer over the past years.
With elevated social risks, the absence of a clear election roadmap, the deterioration of law and order, and the nascent reemergence of community-based tensions also raise political risk, it notes.
"The negative outlook reflects downside risks to Bangladesh's growth outlook beyond our current expectations, which could further strain the country's already- weak fiscal position and exacerbate external vulnerabilities," said the Moody's alerts.

These risks stem from weaker domestic demand and supply disruptions due to recent protests and disruptions to law and order that cloud the export outlook and lower prospects for the ready-made garment sector, it mentions.
While the interim government remains committed to a broad reform agenda, its "capacity to execute remains uncertain," according to the Moody's assessment.
Furthermore, "the political capital to push through challenging reforms could diminish if the interim government cannot swiftly deliver outcomes, including taming inflation and addressing high unemployment".
According to Moody's ratings Bangladesh's local-currency (LC) and foreign-currency (FC) ceilings stand lower at Ba3 and B2 from Ba2 and B1, 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.
The Moody's report says political risk has increased following the recent social unrest that led to the resignation of former Prime Minister Sheikh Hasina and the subsequent introduction of an interim government led by Nobel laureate Prof Muhammad Yunus.
While economic activity has largely normalized under the interim government, political uncertainty, punctuated by occasional lapses in law and order, weakens domestic demand and weighs on activity in the readymade-garment sector, it notes.
"Together with the impact on agricultural production from recent floods, we have lowered our growth projections to 4.5% from 6.3% for FY2025 (from 01-July 2024 to 30-June 2025) and to 5.8% from 6.0% for FY2026," the ratings agency says.
Execution risk for reforms under the current IMF programme has increased, while the lack of a clear election roadmap introduces uncertainty around the longer-term commitment to reform, it mentions.
Political uncertainty and weakening growth increase risks related to government liquidity, banking sector-and external vulnerabilities.
Vulnerabilities in the banking sector have also increased, given the expectation for higher problem loans due to the political and economic disruptions, which raise contingent liability risks for the sovereign, it says.
"We expect a material portion of loans to politically connected borrowers under the Sheikh Hasina regime will default through the year, adding to existing structural weaknesses in the banking system."
Inflation would remain elevated, prompting Bangladesh Bank to maintain a tight monetary-policy stance, Moody's warns, which will likely weigh on consumption.
"Given that inflationary pressures are largely driven by supply-side factors, such as supply-chain disruptions and high domestic food prices, we expect monetary policy effectiveness to be limited," it says.