What does a stable sovereign credit rating mean for Bangladesh?
On November 11, Fitch Ratings, a highly reputed international credit rating agency, affirmed a stable outlook on the sovereign credit rating of Bangladesh. At the same time, other nations in South Asia, specifically those that have comparable economic conditions, have either received a negative outlook or remained at a lower rating than us, as shown by Fitch. Therefore, it raises the question of whether we fared better under the current global pandemic conditions relative to other neighbouring nations.
In line with the opinion of this global rating agency, one can say that we have been successful, to a large extent, in maintaining our economic progress. To briefly explain, a credit rating is an assessment of the creditworthiness of a borrower (in this case a sovereign nation). Maintaining a stable outlook, particularly in the Long-Term Foreign-Currency Issuer Default Rating (IDR) of the sovereign, speaks to the resilience of its external finances and insignificant changes to the government debt quality. While we have received similar ratings in the past few years, maintaining the same stable outlook during the ongoing global pandemic is a noteworthy outcome.
In hindsight, one can argue that although we have maintained a stable outlook, the sovereign rating itself is not considerably high when compared to other sovereign ratings globally. This argument is consistent; however, a relatively low rating is also expected in developing countries. A more important aspect in this analysis would be the change in ratings (i.e. the second order effect) around the negative macroeconomic shock induced by Covid-19. Contrary to the general expectation, based on the current stable rating outlook, we can infer that the quality of our sovereign debt has not deteriorated during the pandemic. This finding, thereby, can have potentially important implications for the broader economy as an unchanged sovereign rating can help maintain investor confidence in our sovereign debt instruments.
Another noteworthy aspect of this latest rating outlook is that our country ceiling of the ratings has also remained unchanged. This is an important phenomenon because, generally, rating agencies tend to apply a sovereign ceiling doctrine whereby during a sovereign downgrade, firms that have the same rating as the sovereign are also downgraded. This exercise is done to ensure that the ratings of the firms within the domestic economy do not pierce the sovereign rating ceiling. Therefore, given the stable sovereign rating outlook, our presumably large domestic firms (including banks and other state-owned entities) that have the same rating as the sovereign are also unlikely to undergo a downgrade in their ratings, which can be important for their local and foreign business activities, unless their fundamentals decline.
To rationalise the stable rating outlook, we can utilise the GDP forecasts by the Asian Development Bank (ADB) for the current year of 2020. In the month of June, ADB had forecasted a positive GDP growth for Bangladesh, whereas there was a negative forecast for most other countries in ADB's comparative economic forecasts for South Asia. Today, a few months later and almost towards the end of the year, Bangladesh is in the leading position in terms of the GDP growth rate forecasts for 2020 relative to all other countries that are included in these comparative economic forecasts. This evidence lends support to the notion that despite bearing the brunt of the economic slowdown triggered by the global pandemic during the second and third quarters of the year, our GDP growth forecasts still materialise. Again, this is a considerable result, especially as other countries in South Asia face more difficulty in dealing with the economic impact of this ongoing pandemic.
Moreover, it is worth mentioning that this trajectory of the GDP growth is not for the current year exclusively. The data from the ADB suggests that Bangladesh experienced the highest GDP growth rate in 2018 and 2019 amongst all the other countries that are included in the comparative economic forecasts data for South Asia. Therefore, it is evident that our economic growth has been sustainable, and this is probably the reason why we have been able to relatively absorb the shock caused by the current global pandemic. Furthermore, I do acknowledge the health concerns and the economic losses faced by various members of the society because of this pandemic. However, this is also a global crisis and, as we know, best efforts are being made to resolve it.
Finally, a small anecdote can shed further light on our discussion above. Fitch Ratings has downgraded the credit rating of South Africa on November 20, 2020. This is mainly due to the impact of the pandemic on the country's economy and, surprisingly, this rating is now equal to that of Bangladesh. These two countries are at different stages of economic development, where South Africa is more developed; nonetheless, their ratings are currently on a par. This anecdote highlights how the pandemic has hurt all economies, even more developed ones, and therefore our economy's resilience under such dire economic conditions further substantiates the positive economic outlook.
In summary, the current global pandemic has adversely affected all economies. Thereby, one can expect a similar negative impact on our economy as well. While it is true that a number of businesses have been affected, the current stable (unchanged) status of our sovereign ratings also signifies the overall fiscal strength that our domestic economy has gained over time. This is further emphasised by the positive trend in the economic indicators, for example the GDP growth rate shown by international organisations such as the ADB. Hence, while our goal is to work towards further development, it may be worthwhile to incorporate the indications that we receive from reputable global agencies about our economy in this process.
Md Abdul Wasi is a lecturer of finance at North South University in Dhaka (currently on leave).