Credit rating concern needs attention

Asjadul Kibria | Published: February 18, 2015 00:00:00 | Updated: November 30, 2024 06:01:00

Over the years, linkage of Bangladesh economy with global market has intensified. The country is now considered one of the potential and growing economies capable of making a better space for itself in the near future. Any development in the country, be it political or business-related, now attracts global attention. Global agencies are regularly making projections on the country's economic trends. Some players of the international financial market are gradually increasing their stake in Bangladesh.
Thus, country credit rating, technically known as sovereign credit rating, becomes essential. All three large international rating agencies have already included Bangladesh in their rating scales. Two agencies, Moody's and Standard & Poor's (S&P's), started to rate Bangladesh's creditworthiness in 2009. Later, Fitch Ratings also joined. Â
To put it simply, sovereign credit rating is a mechanism to measure strength of a country's economy in terms of fulfilling international financial obligations. Most important of the obligations is sovereign debt or foreign loan. Developed and many developing countries are very much linked with international financial market by securing loans from this market.
Usually, these countries issue sovereign bonds of different maturities and the yield rates are determined by the strength of repayment capability. International investors in such bonds try to understand whether the issuing country has the ability to repay the loans on time or will become defaulter. The risk of loan default is reflected in the credit rating. The higher the risk, the higher the interest rate. Generally, bonds issued by developed countries like Switzerland is considered quite safe, as reflected in the very good rating, and so offer low rate of yields. Bonds from developing countries, on the other hand, are usually considered risky with higher yields and rated accordingly. Â
Against this backdrop, the latest indication of Moody's to downgrade Bangladesh's country credit rating needs to be reviewed carefully.Â The agency pointed out the ongoing political violence as a negative factor for downgrading the rate. That means, in near future, the agency may rate Bangladesh more risky for lending or less attractive for investment.Â Â
Agencies have rating scales, represented by alphabet and number, to tell the story in brief. Moody's currently rated Bangladesh as 'Ba3' which generally means stable economic situation. As per the agency's global rating scale, "obligations rated 'Ba' are judged to be speculative and are subject to substantial credit risk." The agency also adds numerical modifiers 1, 2 and 3 to each generic rating classification and modifier 3 indicates a ranking in the lower end of that generic rating category.
So, just one step slip from 'Ba3' will put Bangladesh at 'B1' category meaning the country's global "obligations are subject to high credit risk". This implies that if someone wants to offer some debt to Bangladesh by purchasing Bangladeshi sovereign bond through global financial market, the investor has to be more cautious. It is because, by purchasing sovereign bond, he or she is actually investing money with relatively higher risk. Thus the risk coverage will result in higher interest rate. On the opposite side, as a bond issuer, Bangladesh government has to bear additional cost of borrowing due to relatively higher risk of default.Â Â
One very important thing here is that Bangladesh has not issued any sovereign bond to secure loan from international financial market. Thus, there is little to worry on prospect of borrowing from the global market. There is, however, a move within the government for issuance of sovereign bond. This type of bond is fully backed by the government and so considered less risky or safer to invest on compared to corporate bond. So, yield is also lower compared to corporate or other types of bond. Despite this, the risk factor is an inherent component of debt or bond.
There are some private foreign borrowings. Since 2008, local corporates are allowed to borrow from international financial market. So far, some $5.5 billion has been borrowed by various companies. Credit rating has definitely helped them to avail such loans.Â Â
Although the primary objective of credit rating for a country is to measure its credit worthiness, it also serves as a critical benchmark for foreign investors and foreign traders. If any multinational corporation (MNC), thinks to invest in a country like Bangladesh, it will review the existing credit ratings. It is because credit rating provides a summarised version of the macroeconomic indicators.
However, it is also true that a foreign investor doesn't solely depend on sovereign credit rating and there is no strong correlation between credit rating and foreign direct investment (FDI), at least for the developing countries. This can be observed from the trend of FDI inflow into Bangladesh in last five years and credit ratings in the corresponding years.
FDI inflow in FY'10 declined to $913 million from $960.6 million in FY'09. The declining trend continued in FY'11 when FDI inflow stood at $779 million. During the period, the country was rated 'stable' by Moody's and S&P's. FDI inflow jumped to $1194.8 million in FY'12 and further increased to $1730.6 million in FY'13. Finally, FDI declined to $1551 million in FY'14.
During this period Bangladesh has achieved a 'stable outlook' rating by both Moody's and S&P's. Fitch Ratings also offer similar kind of rating. Thus, the agencies found Bangladesh credit worthiness almost similar for last five years. Thus these ratings do not always influence FDI inflow.
One should keep in mind that these agencies have already faced severe criticism for their wrong and biased rating globally. During the global financial crisis in 2008, it was found that these agencies offered very good ratings to risky financial instruments or derivatives to acquire huge financial gains for themselves and their respective clients. Their good ratings influenced many investors to invest in junk and hybrid financial products like credit default swap (CDS). Their controversial ratings on Greece and Spain also drew condemnation when Europe entered into deep recession.
Moody's latest observation is that the intensifying political unrest is negative for Bangladesh as "it is weighing on the sovereign's export performance, investment activity and headline growth." There is no doubt that the ongoing political turmoil, marked by regular arson on human life and property, is gradually eroding the potential of Bangladesh. The country's apex trade body, FBCCI (Federation of Bangladesh Chambers and Industries), has already claimed that the damage of political turmoil stood at Tk 750 billion (US$ 9.6 billion) in a month. This is around 5.5 per cent of the country's GDP, estimated at Tk 13509.20 billion in FY14.Â The value of damage is almost equal to current annual development programme (ADP) worth Tk 803 billion ($10.29 billion).
Thus, downgrading the credit rating by Moody's or other international agencies is not an unusual thing. It is, at the same time, not very worrying that a rating agency hinted to a slide. But, it cannot be ignored also as the crisis of Bangladesh economy is visible to all and reasons are not unknown. Â
asjadulk@gmail.com