Moody’s places Bangladesh’s ratings under review

Major global rating agency Moody's has placed Bangladesh's long-held credit rating of Ba3 on review for downgrade, in a development that stands to make the country's foreign transactions and lending tougher.

"The decision to place the ratings on review for downgrade is driven by Moody's assessment that Bangladesh's deteriorating external position raises vulnerability and government liquidity risks in a way that may not be consistent with its current rating," it said in an update on Friday.

On December 6, a rating committee was called to discuss Bangladesh's institutions and governance strength and fiscal or financial strength, including its debt profile, all of which have "materially decreased".

Bangladesh's "rapidly" declining foreign exchange reserves adequacy, acute energy crisis and dollar liquidity shortage have raised concerns about the government's ability to service external debt payments.

"The inability of the government to arrest the deterioration of reserves despite the taka's devaluation and implementation of unorthodox policy measures highlights the severity of the situation."

The widening current account deficit due to unfavourable terms of trade as well as the Bangladesh Bank's attempt to defend the taka has eroded foreign exchange reserves by around $11 billion in the last 12 months, it said.

Although reserves remain at relatively high levels, the import coverage ratio has declined significantly.

As of November 2022, foreign exchange reserves (excluding gold and SDRs) fell to $30 billion or around four months of imports from eight months in January 2021 -- despite import restrictions and energy rationing, Moody's said in its assessment.

While the devaluation of the taka will ease balance of payments pressures in the medium-term, as will an expected rebound in remittances, Moody's assesses that the import coverage ratio will continue to weaken towards three months of imports, while the current account will remain wide (around 4 percent) over the next few years.

"Risks to reserves adequacy are heightened by uncertainties around the composition of reserves."

The central bank currently includes assets from the Export Development Fund, swap lines with the government of Sri Lanka and "other assets with questionable liquidity" as part of its official reserves.

"In Moody's view, reserves adequacy will be materially weaker if these assets do not meet liquidity requirements."

Although Bangladesh has "modest debt payments due to the concessional nature of its external debt with long maturities", weak debt affordability -- with interest payments absorbing a widening share of the government's narrow revenue base -- poses further risks.

Bangladesh's longstanding weak fiscal revenues and rising energy costs complicate the government's immediate policy choices, with increasing subsidy costs putting pressure on the government's fiscal metrics.

Moody's expects the fiscal deficit to remain wide, around 5-5.5 percent of GDP over the next few years, increasing the debt burden to above 40 percent of GDP.

The devaluation of the taka weakens debt affordability, with interest payments expected to consume almost 25 percent of revenues.

The energy crisis also exacerbates Bangladesh's weakening macroeconomic environment -- with high inflation undermining consumption and slowing exports and remittances impacting growth -- as energy shortages may affect garment production, Moody's said.

While Moody's expects that Bangladesh will continue to secure official financing through international financial institutions, with the IMF programme expected to unlock further financing, the financing options available to the government to stabilise the balance of payments remain limited due to the absence of international issuance and limited domestic capital markets, while FDI is very limited.

Foreign direct investment flows are weak at 0.5 percent of GDP in fiscal 2021-22.

Furthermore, the IMF programme conditions are yet to be finalised, "raising uncertainties around the government's ability to meet them and their economic and social impact".

The limited foreign exchange liquidity has also affected banks and companies operating in Bangladesh with the need for cross-border transactions.

"Therefore Moody's assessment of government liquidity risk has worsened."

The capital flow management measures introduced by the BB such as increased margins against import letters of credit (LCs), increased monitoring of LCs, and import restrictions have failed to arrest the deterioration of reserves.

"Such inefficient measures, in addition to the implementation of unorthodox, distortive monetary policy tools such as a multiple exchange rate regime, has lowered Moody's assessment of the institution's monetary and macroeconomic policy effectiveness."

The rating review will focus on understanding the scope and conditions under which IMF support will be provided, it said.

Moody's will assess the government's willingness and ability to consistently meet the IMF programme's requirements, given the challenging social conditions that have been intensified by recent fuel and energy shortages, as well as the support that the IMF programme can facilitate from other international institutions.

In addition, the review will seek to refine the assessment of reserves adequacy given the uncertainty around the composition of the sovereign's foreign currency reserves.

Concurrently, Bangladesh's local-currency (LC) and foreign-currency (FC) ceilings have been lowered to Ba1 and Ba3 from Baa3 and Ba2, 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; balancing 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, taking into account low external indebtedness.

No default event (on bonds or loans) has been recorded for Bangladesh since 1983, it said.