Moody’s new credit rating puts nation at par with Honduras
Special Report :
Moody’s Investors Service (Moody’s) on Tuesday has downgraded the government of Bangladesh’s long term issuer and senior unsecured ratings by one notch to B1 from Ba3 and affirmed short term issuer ratings at Not Prime. The current rating is 4 levels below investment grade according to Bloomberg putting the nation at par with Honduras.
Earlier Moody’s had placed Bangladesh’s long-term issuer and senior unsecured ratings at Ba3 on-review for a downgrade. Today’s rating action completes the review initiated last December. The rating outlook, Moody’s said, remains stable.
Bangladesh, which relies primarily on remittances from its nearly 20 million migrant workers as source of foreign exchange, has seen its external debt pile up from 22.1 billion USD to over 96 billion USD end of last year.
Government’s Economic Relations Department ( ERD) has estimated that the overall debt repayment would stand at $2.7 billion in FY23, of which $1.9 billion would be principal and the balance interest.
In FY24, this overall repayment volume would extend to $3.28 billion, with $2.3 billion in principal and $980 million in interest.
In March, Moody’s had downgraded its outlook for Bangladesh’s banking sector (independent of the sovereign) from stable to negative.
A sovereign credit rating provides an impartial evaluation of a country’s or sovereign entity’s credit reliability, indicating the potential risk involved in investing in a nation. Previously at Ba3, Bangladesh held Moody’s lowest rating for ‘speculative’ grade bonds. Now, with a B1 rating, it has reached Moody’s highest rating category, although it still falls under the ‘non-investment grade’ bonds classification.
B1 signifies that the issuer is relatively risky, with a ‘higher than average’ chance of default.
In justifying this downgrade, Moody’s evaluation indicates that Bangladesh continues to face significant external vulnerabilities and liquidity risks. Coupled with the institutional weaknesses revealed during the ongoing crisis, these factors align the country’s credit profile with a B1 rating.
Despite some easing, ongoing dollar scarcity and deterioration in foreign exchange reserves indicate continued pressures on Bangladesh’s external position, exacerbating imports constraints and as a result energy shortages.
Concurrently, the government is yet to fully roll back its import control measures and unconventional policies such as the multiple exchange rate system and caps on interest rates. These unconventional strategies are leading to economic distortions.
In conclusion, the government’s policy options are limited due to the disproportionately low tax revenues compared to the overall size of the economy. This suggests a decline in debt affordability, as the devaluation of the taka and the short-term nature of domestic debt lead to increased interest payments.
Moody’s expects fiscal reforms will take years to materialize. As such the country must rely on foreign debt financing to help reduce pressures on the external and fiscal metrics. External buffers will continue to remain weaker and higher debt levels will degrade fiscal strength.
Simultaneously, Bangladesh’s local-currency (LC) and foreign-currency (FC) ceilings have been downgraded to Ba2 and B1 from Ba1 and Ba3, respectively.
Moody’s placed LC two notches above Bangladesh’s sovereign rating, reflecting weak predictability and reliability of government institutions and high external imbalances, that raise risks for the garment sector’s contributions to government revenue.
Economists suspect, the heavily subsidized ultra-low margin exports contribute little to shore up its foreign exchange reserves. Apparel exports, which account for 80% of exports, qualify for cash incentives and subsidies for as little as 20% value addition.
Such cash incentives on exports range from 2% to 20% (halal meat) according to Bangladesh central bank data providing. These policies have contributed to inflated export figures in recent times with media reports affirming some businesses pocketing millions of USD using ghost exports (claiming cash incentives against zero real exports).
Moody’s placed FC ceiling 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.
The interbank market, the local currency Taka has weakened 4% this year to about 107 BDT/USD. The nation has separate exchange rates for interbank transactions, export proceeds and remittances.
