Moody credit downgrade a huge blow for the Bangladesh economy

According to the author, the government must critically examine Moody's credit downgrade and respond properly.


June 1, 2023

DHAKA – We’re alarmed to learn that the US-based global credit rating agency Moody’s Investors Service has downgraded Bangladesh’s sovereign rating by one notch from Ba3 to B1. The disclosure, coming as it does just before the unveiling of Bangladesh’s national budget for FY23-24, represents a huge threat to its post-Covid economic aspirations with the experts calling it “one of the worst incidents” in the recent history of our economy. And it couldn’t have come at a worse time.

In simple terms, the downgrade – the first since Moody’s began rating Bangladesh in 2010 – means a blow to our creditworthiness. Not only will it tarnish the country’s image abroad but it will also have tangible effects on local businesses. Businesses will likely face higher borrowing costs for loans from foreign sources, while foreign investors may be wary of the increased credit risk associated with investing in Bangladesh. The fallout may extend beyond loans and investments as well. The cost of doing business may go up as banks may increase charges for import payments, known as letters of credit (LCs). Moreover, local banks may face tougher negotiations with global lenders regarding commissions and charges for settling foreign exchange transactions.

The question is, what prompted the downgrade? Reportedly, Moody’s assessment is that Bangladesh’s heightened external vulnerability and liquidity risks are persistent, as are its institutional weaknesses. “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,” it said. Additionally, the government’s failure to fully reverse import control measures and unconventional policies, such as a multiple exchange rate regime and interest rate caps, is contributing to market distortions, according to a report issued by the agency. Persistently low revenue generation and rising interest payments have also resulted in weakening fiscal metrics, especially debt affordability.

In the coming days, there will be a lot of discussion about the downgrade and its implications. But as things stand, this is indeed a wake-up call for Bangladesh. To get back up from the downgrade or prevent further downgrades, it is imperative that the government takes this seriously and restores confidence by addressing our economic vulnerabilities through effective policy measures. The future trajectory of our economy will depend a lot on how it responds to this latest threat.

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