Shrinking forex reserves induce negative credit ratings for Bangladesh

Staff Reporter :
Bangladesh risks negative credit ratings due to external finance factors, including marked or sustained declines in foreign exchange reserves, according to the latest report by a global credit rating agency Fitch Ratings.

Reserve dynamics may have a greater impact on frontier market sovereigns, especially where reserve coverage ratios are low and external liquidity positions fragile, it said in its latest assessment report published on 7 September.

“In our most recent rating assessments, we stated that external finance factors, potentially including marked or sustained declines in foreign-exchange reserves, could be a driver of negative rating action in sovereigns such as Bangladesh,” it observes in a latest assessment report.

Fitch Ratings also kept the Maldives, Mongolia and Vietnam on the list of countries that risk negative rating action in the report on the reserves trends that diverge among Asia-Pacific sovereigns.

However, the rating agency said Bangladesh improved reserve transparency by adopting IMF definitions in June this year.

The International Monetary Fund informed Bangladesh of the method that has to be used to calculate the actual forex-reserve status.

There were some other conditions. The amount used to form the export development fund (EDF), long-term fund (LTF) and green transformation fund (GTF), money given to Biman Bangladesh Airlines through Sonali Bank for buying aircraft and the money spent for dredging Rabnabad channel of Payra port have to be deducted in calculating the amount of actual reserves.

The IMF data show country’s forex reserves declined 31 percent over January-July, but the Fitch estimate the decline could be around 16 percent if the new definitions applied throughout the period, the rating agency added .

Earlier on 30 May this year, Moody’s Investors Service downgraded Bangladesh’s rating for the first time while keeping the country’s long-term outlook stable, which indicates the rating agency does not anticipate any significant changes in the economy’s creditworthiness or its ability to meet its financial obligations.

Moody’s assessment came due to heightened external vulnerability and liquidity risks amid deterioration in foreign exchange reserve.

This indicates continued pressure on Bangladesh’s external position, exacerbating import constraints and, as a result, energy shortages.

The multiple exchange rate regimes and the lending rate cap also came into consideration in the country’s downgrade.