The New York based international credit rating agency Standard & Poor’s (S&P) downgraded Bangladesh's credit rating at a time when the country’s economy is feeling steep pressure due to loss of lives and destruction of properties during the quota reform movement.
S&P Global Ratings lowered its long-term foreign and local currency sovereign credit ratings for Bangladesh from 'BB-' to 'B+'. The outlook on the long-term ratings however remains stable.
At the same time, the agency affirmed their 'B' short-term ratings. S&P also revised the transfer and convertibility assessment to 'B+' from 'BB-'. The agency published its rating report on its website on July 30.
In May, Fitch also downgraded Bangladesh from 'BB-' to 'B+' due to a sustained weakening of external buffers that could likely prove challenging to reverse, despite recent policy reforms.
Experts said this type of credit ratings are basically done to know the debt repayment capacity of an organization or a country. Such ratings help investors make proper investment decisions.
Speaking to The Business Post, former director general of Bangladesh Institute of Bank Management (BIBM) Toufic Ahmad Choudhury said, “A fall in credit rating means that a country's credit capacity is decreasing.
“This can happen from both receiving and paying of foreign loans. A downgrade can make it more difficult for a country to get new loans, and could increase the cost of repayment.”
The biggest problem will be witnessed in terms of new investments. Foreign investments will decrease, and portfolio investments will fall as well, added Toufic, also a credit rating expert.
For the last few years, Bangladesh has not received net foreign direct investment (FDI) as expected. In the calendar year 2023, FDI was $3 billion – a figure 13.67 per cent lower compared year-on-year.
Meanwhile, the portfolio investment was $111 million negative during the July-May period of FY24, according to Bangladesh Bank data.
Country’s external debt position stood at $99.03 billion until March 2024. The growth in loan repayments is now higher compared to that of new loans received.
According to Balance of Payments (BoP) data, Bangladesh received $6.78 billion medium and long-term (MLT) loans during the July-May period of FY24 – a 2.8 per cent growth. But the country repaid $1.84 billion in the same period, which was a 16 per cent growth year on year.
Zahid Hussain, former lead economist at World Bank Dhaka office, said, “The overall message of this credit rating downgrade is that confidence has declined in our economy. This rating will especially affect foreign buyers and investors, which will further deepen the ongoing negative perception.”
It should be noted that the loss of life and property in Bangladesh amid the quota reform movement and the shutdown of the internet are being widely covered by the international media. Experts think such coverage is creating a negative impact on Bangladesh globally.
Zahid Hussain added, “S&P believes that the economy of Bangladesh will remain stable in the coming days. But they have not taken into consideration the ongoing unrest.”
The rating agency also downgraded Bangladesh’s position from BB- to B+ in terms of transfer and convertibility assessment.
Explaining this position, Toufic said, “It indicates how easily a foreign investor in any country can repatriate their profits to their home country.”
What’s the S&P take?
According to the rating agency, Bangladesh’s external liquidity is weakening, as indicated by sustained depletion of its foreign exchange reserves.
Bangladesh is facing severe USD shortages since the last financial year. The Bangladesh Bank is trying to pump USD to the money market from the reserves, as the forex reserves steadily declined from $48 billion in August 2021, to less than $20 billion now.
Taka’s devaluation against the USD has been witnessing a sharp trend since last FY due to the depletion of reserves. It has fallen by about 25 per cent in the last FY. The crawling peg system was introduced in May this year to prevent currency depreciation and depletion of reserves.
However, S&P believes that it will take time for Bangladesh to avail the results.
Macroeconomic policies enacted in May 2024 – such as transitioning to a crawling-peg exchange rate regime, allowing the Taka to depreciate, and tightening of monetary policy – could help rebuild external buffers, although the progress will likely be gradual.
Meanwhile, interest rates are left to the market to control high inflation. On the other hand, the government allocated Tk 1,12,665 crore for interest payment in the FY25 budget, which is over 14 per cent of the total expenditure. The budget deficit stands at Tk 2,56,000 crore excluding grants.
In this context, S&P mentioned that a high interest expense ratio and a narrowing but still relatively large budget deficit will continue to weigh on our fiscal assessment.
