Moody's downgrades Bangladesh's ratings to B1; outlook stable

Black_cats · May 30, 2023

Moody's downgrades Bangladesh's ratings to B1; outlook stable

The Moody's Investors Service (Moody's) today downgraded the government of Bangladesh's long term issuer and senior unsecured ratings to B1 from Ba3 and affirmed short term issuer ratings at Not Prime.

This rating action concludes the review for downgrade initiated on 9 December, 2022. The rating outlook is stable.

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.

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.

Meanwhile, the 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.

More to follow...