Moody's Investors Service has downgraded Bangladesh’s long-term issuer and senior unsecured ratings to B1 from Ba3, and affirmed short-term issuer ratings at Not Prime. The rating outlook is stable, and it concludes the review for the downgrade initiated last December.
Moody's assessment is that Bangladesh's heightened external vulnerability and liquidity risks are persistent, and that, together with institutional weaknesses uncovered during the ongoing crisis, the sovereign's credit profile is consistent with a B1 rating, read a press release.
Despite some easing, the ongoing USD scarcity and deterioration in foreign exchange reserves indicate continued pressures on Bangladesh's external position, exacerbating imports constraints and as a result energy shortages.
Meanwhile, the Bangladesh government has not yet fully reversed its import control measures and unconventional policies including a multiple exchange rate regime and interest rate caps, which are creating distortions.
Finally, a very low level of fiscal revenues relative to the size of the economy constrain the government's policy choices and point to weakening debt affordability as higher interest payments result from the taka devaluation and short maturities for domestic debt.
Although Moody's expects external financing to help alleviate pressures on the external and fiscal metrics, external buffers will remain weaker than before the pandemic and higher debt levels will weaken fiscal strength, particularly as Moody's expects fiscal reforms will take years to materialise.
Concurrently, Bangladesh's local-currency (LC) and foreign-currency (FC) ceilings have been lowered to Ba2 and B1 from Ba1 and Ba3, 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.
External vulnerability risks will stabilise
In Moody's assessment, Bangladesh's external position will remain structurally weaker than before the pandemic.
Moody's expects external financing will halt the deterioration of foreign exchange reserves, which will stabilize during the next fiscal year 2024 (ending June 2024). However, reserves will not recover to pre-pandemic levels for the next 2-3 years.
Unfavourable terms of trade followed by a contraction in trade credit, as well as Bangladesh Bank's initial attempt to defend the taka, have eroded foreign exchange reserves by over $17 billion (or 40 per cent) since their peak in August 2021.
Consequently, the import coverage ratio and Moody's external vulnerability indicator (EVI, the ratio of external debt payments and foreign currency deposits to foreign exchange reserves) have weakened significantly, with gross foreign exchange reserves (excluding gold and SDRs) declining to $27 billion or around 3.7 months of goods and services imports as of April 2023 from $45 billion (around 7 months) in August 2021 – despite import restrictions and energy rationing.
While the devaluation of the taka and import restrictions, along with resilient exports but tepid remittance flows, have turned the current account back into surplus, pressures on the current account remain due to still high energy commodity prices.
Moody's expects gross foreign exchange reserves to remain below $30 billion for the next two to three years, with net reserves likely lower, following Bangladesh Bank's commitment to the International Monetary Fund (IMF) to start reporting reserves net of assets such as the Export Development Fund (EDF).
On a gross basis, Moody's assesses that the import coverage ratio will remain around 3 months of imports, while Bangladesh's EVI will significantly weaken to 90 per cent (2024F), vs. about 30 per cent – 40 per cent pre-pandemic.
Net reserves are currently at approximately $20 billion (or 2.7 months of import cover), implying an EVI of 115 per cent.
Fiscal strength to weaken
In Moody's assessment, persistently low revenue generation and rising interest payments will lead to weakening fiscal metrics, especially debt affordability.
The increase in the deficit, which added to higher debt levels, was driven by an inflated government subsidy bill due to higher energy, fertilizer and food costs despite significant price adjustments lately, while revenues fell due to the import restrictions.
Moody's expects the fiscal deficit to remain relatively wide, around 5 per cent – 5.5 per cent of GDP over the next few years, increasing the debt burden to almost 40 per cent of GDP by end fiscal 2026 from below 30 per cent in fiscal 2022.
Bangladesh's debt burden remains moderate compared to peers, and external debt payments will remain manageable due to the concessional nature of its external debt with long maturities.
Nevertheless, interest payments will consume a widening share of the government's narrow revenue base, rising to a very high level of above 25 per cent in fiscal 2023-25 from below 20 per cent in fiscal 2019 before the pandemic.
While the IMF programme will spur some revenue mobilisation measures, Moody's expects improvements in revenue collection and tax administration will be slow, considering Bangladesh's poor track record of implementation as well as administrative and efficiency barriers.
Moody's expects the revenues to GDP ratio to improve modestly over the next 2-3 years, although remain below 10% of GDP and still significantly below peers at the B1 rating level.
Rationale for stable outlook
The stable outlook is based on Bangladesh's continued access to concessionary financing and support from international financial institutions. Moody's expects external financing to help alleviate pressures on the external and fiscal metrics.
Although the sovereign's financing options remain narrow due to the absence of international issuance, underdeveloped domestic capital markets, and limited foreign direct investment (FDI), concessional financing will support Bangladesh's funding plan over the next 2-3 years, enabling the stabilisation of foreign exchange reserves.
The IMF programme, approved in January 2023, will provide up to $3.3 billion to manage Bangladesh's immediate economic challenges, as well as $1.4 billion to mitigate climate change risks.
The World Bank and Asian Development Bank have also pledged an additional $1 billion and $1.6 billion in support, respectively.
The stable outlook is also supported by Bangladesh's economic resilience. Moody's expects growth to recover to 6 per cent in fiscal 2025, supported by its globally competitive ready-made garment industry.
At the same time, this resilience is balanced by the country's low per capita income and constraints in infrastructure and human capital, low economic competitiveness, and high concentration in drivers of economic growth compared with peers.
Bangladesh's economy is also exposed to both sudden and gradual climate change risks that can create adverse economic and social costs.
