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Singapore, December 09, 2022 -- Moody's Investors Service ("Moody's") has today placed the Government of Bangladesh's Ba3 long term issuer and senior unsecured ratings on review for downgrade. Short term issuer ratings are affirmed at Not Prime and the outlook was stable before being placed under review.
The decision to place the ratings on review for downgrade is driven by Moody's assessment that Bangladesh's deteriorating external position raises external vulnerability and government liquidity risks in a way that may not be consistent with its current rating. This assessment also reflects governance weaknesses in the ability of institutions to take credible measures to arrest the deterioration of reserves adequacy. While Moody's expects the agreement on the Extended Credit Facility/Extended Fund Facility and the Resilience and Sustainability Facility with the International Monetary Fund (IMF) to provide some external financing, programme conditions have not been finalised, raising uncertainties around the government's ability to meet them and their economic and social impact. Risks to reserves adequacy are compounded by uncertainty around the composition of reserves.
Bangladesh's foreign exchange reserves are declining at a rapid pace, largely driven by rising costs for energy imports and moderating growth in export earnings. The rise in food and fertilizer prices has also inflated the subsidy bill for the government. While the Taka devaluation and softening of some commodity prices could improve terms of trade in the medium-term, Moody's expects the energy crisis to exacerbate balance of payments and liquidity risks in the near-term.
The sovereign's financing options remain narrow due to the absence of international issuance and limited domestic capital markets, while FDI are very limited. Although Bangladesh has modest debt payments due to the concessional nature of its external debt with long maturities, weak debt affordability – with interest payments absorbing a widening share of the government's narrow revenue base – poses further risks.
The rating review will focus on understanding the scope and conditions under which IMF support will be provided. Moody's will assess the government's willingness and ability to consistently meet the IMF programme's requirements, given the challenging social conditions that have been intensified by recent fuel and energy shortages, as well as the support that the IMF programme can facilitate from other international institutions. In addition, the review will seek to refine the assessment of reserves adequacy, given uncertainty around the composition of the sovereign's foreign currency reserves.
Concurrently, Bangladesh's local-currency (LC) and foreign-currency (FC) ceilings have been lowered to Ba1 and Ba3 from Baa3 and Ba2, 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; balancing 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, taking into account low external indebtedness.
RATINGS RATIONALE
RATIONALE FOR INITIATING THE REVIEW FOR DOWNGRADE
Bangladesh's declining foreign exchange reserves adequacy, acute energy crisis, and dollar liquidity shortage have raised concerns about the government's ability to service external debt payments. The inability of the government to arrest the deterioration of reserves, despite the Taka devaluation and implementation of unorthodox policy measures highlights the severity of the situation.
The widening current account deficit due to unfavourable terms of trade, as well as Bangladesh Bank's attempt to defend the Taka, have eroded foreign exchange reserves by around $11 billion for the last 12 months. Although reserves remain at relatively high levels, the import coverage ratio has declined significantly. As of November 2022, foreign exchange reserves (excluding gold and SDRs) fell to $30 billion or around 4 months of imports from 8 months in January 2021 – despite import restrictions and energy rationing. While the devaluation of the Taka will ease balance of payments pressures in the medium-term, as will an expected rebound in remittances, Moody's assesses that the import coverage ratio will continue to weaken towards 3 months of imports, while current account will remain wide (around 4%) over the next few years.
Risks to reserves adequacy are heightened by uncertainties around the composition of reserves. Bangladesh Bank currently includes assets from the Export Development Fund (EDF), swap lines with the Government of Sri Lanka, and other assets with questionable liquidity as part of its official reserves. In Moody's view, reserves adequacy will be materially weaker if these assets do not meet liquidity requirements.
Bangladesh's long-standing weak fiscal revenues and rising energy costs complicates the government's immediate policy choices, with increasing subsidy costs putting pressure on the government's fiscal metrics. Moody's expects the fiscal deficit to remain wide, around 5.0-5.5% of GDP over the next few years, increasing the debt burden to above 40% of GDP. The devaluation of the Taka weakens debt affordability, with interest payments expecting to consume almost 25% of revenues. The energy crisis also exacerbates Bangladesh's weakening macroeconomic environment – with high inflation undermining consumption and slowing exports and remittances impacting growth – as energy shortages may affect garment production.
While Moody's expects that Bangladesh will continue to secure official financing through international financial institutions, with the IMF programme expected to unlock further financing, the financing options available to the government to stabilise the balance of payments remain limited. Bangladesh has no established access to international financial markets and domestic markets remain very shallow. Foreign direct investment flows are weak at 0.5% of GDP in fiscal 2022. The limited foreign exchange liquidity has also affected banks and companies operating in Bangladesh with the need of cross-border transactions. Therefore Moody's assessment of government liquidity risk has worsened.
Finally, capital flow management measures introduced by Bangladesh Bank such as increased margins against import letters of credit (LCs), increased monitoring of LCs, and import restrictions have failed to arrest the deterioration of reserves. Such inefficient measures, in addition to the implementation of unorthodox, distortive monetary policy tools such as a multiple exchange rate regime, has lowered Moody's assessment of the institution's monetary and macroeconomic policy effectiveness.
GDP per capita (PPP basis, US$): 7,044 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 6.9% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.6% (2021)
Gen. Gov. Financial Balance/GDP: -3.7% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.1% (2021) (also known as External Balance)
External debt/GDP: 19.6% (2021)
Economic resiliency: ba3
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 06 December 2022, a rating committee was called to discuss the rating of the Bangladesh, Government of. The main points raised during the discussion were: The issuer's institutions and governance strength, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become less susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings would likely be confirmed at their current level if pressures on Bangladesh's external position were to ease durably, for example due to effective policy measures that would rebuild foreign exchange reserves to adequate levels and a credible financing plan to address the wide current account deficit. Additionally the implementation of fiscal reforms that would increase revenue mobilisation in particular, leading to a material narrowing of fiscal deficits in the next few years and contributed to bolstering debt affordability, would also support a confirmation of the rating.
The rating would likely be downgraded if pressures on Bangladesh's external position were to keep building, with an enduring erosion of foreign exchange reserves and uncertainty surrounding financing sources, while the energy crisis continued to put pressure on external and fiscal metrics.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Bangladesh's very highly negative (CIS-5) ESG Credit Impact Score reflects very high exposure to environmental and social risks, and weak governance which, together with low financial capacity, constraint the sovereign's ability to adjust to environmental and social risks.
The exposure to environmental risk is very highly negative (E-5). As a low-lying country with large coastal areas, Bangladesh is highly prone to flooding, which disrupts economic activity and raises social costs. Low incomes and weak infrastructure quality compound the impact of weather-related events on the economy, and in turn, associated fiscal costs. In addition, the magnitude and dispersion of seasonal monsoon rainfall also influence agricultural sector growth, generating some volatility and raising uncertainty about rural incomes and consumption. As a net energy importer, exposure and risks related to carbon transition are not present.
We assess Bangladesh's exposure to social risks as very highly negative (S-5). Low incomes stem in part from physical and social infrastructure constraints to economic development that will take time to address. That said, per capita incomes have grown strongly over the past decade and poverty rates have declined sharply, thanks to high and stable economic growth. This has also delivered improvement in access to basic services, although Bangladesh's challenges related to improvements in educational opportunities and outcomes, health and safety, and labor force inclusion remain areas of social risk.
Bangladesh's weak institutions and governance profile constrain its rating, as captured by a highly negative governance issuer profile score (G-4). Challenges in control of corruption and rule of law weaken existing institutions, while the credibility of legal structures is also limited. These governance challenges have in part contributed to asset quality issues in the banking sector. Besides, a deteriorating monetary policy framework undermines macroeconomic stability, while challenging fiscal prudence.
The decision to place the ratings on review for downgrade is driven by Moody's assessment that Bangladesh's deteriorating external position raises external vulnerability and government liquidity risks in a way that may not be consistent with its current rating. This assessment also reflects governance weaknesses in the ability of institutions to take credible measures to arrest the deterioration of reserves adequacy. While Moody's expects the agreement on the Extended Credit Facility/Extended Fund Facility and the Resilience and Sustainability Facility with the International Monetary Fund (IMF) to provide some external financing, programme conditions have not been finalised, raising uncertainties around the government's ability to meet them and their economic and social impact. Risks to reserves adequacy are compounded by uncertainty around the composition of reserves.
Bangladesh's foreign exchange reserves are declining at a rapid pace, largely driven by rising costs for energy imports and moderating growth in export earnings. The rise in food and fertilizer prices has also inflated the subsidy bill for the government. While the Taka devaluation and softening of some commodity prices could improve terms of trade in the medium-term, Moody's expects the energy crisis to exacerbate balance of payments and liquidity risks in the near-term.
The sovereign's financing options remain narrow due to the absence of international issuance and limited domestic capital markets, while FDI are very limited. Although Bangladesh has modest debt payments due to the concessional nature of its external debt with long maturities, weak debt affordability – with interest payments absorbing a widening share of the government's narrow revenue base – poses further risks.
The rating review will focus on understanding the scope and conditions under which IMF support will be provided. Moody's will assess the government's willingness and ability to consistently meet the IMF programme's requirements, given the challenging social conditions that have been intensified by recent fuel and energy shortages, as well as the support that the IMF programme can facilitate from other international institutions. In addition, the review will seek to refine the assessment of reserves adequacy, given uncertainty around the composition of the sovereign's foreign currency reserves.
Concurrently, Bangladesh's local-currency (LC) and foreign-currency (FC) ceilings have been lowered to Ba1 and Ba3 from Baa3 and Ba2, 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; balancing 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, taking into account low external indebtedness.
RATINGS RATIONALE
RATIONALE FOR INITIATING THE REVIEW FOR DOWNGRADE
Bangladesh's declining foreign exchange reserves adequacy, acute energy crisis, and dollar liquidity shortage have raised concerns about the government's ability to service external debt payments. The inability of the government to arrest the deterioration of reserves, despite the Taka devaluation and implementation of unorthodox policy measures highlights the severity of the situation.
The widening current account deficit due to unfavourable terms of trade, as well as Bangladesh Bank's attempt to defend the Taka, have eroded foreign exchange reserves by around $11 billion for the last 12 months. Although reserves remain at relatively high levels, the import coverage ratio has declined significantly. As of November 2022, foreign exchange reserves (excluding gold and SDRs) fell to $30 billion or around 4 months of imports from 8 months in January 2021 – despite import restrictions and energy rationing. While the devaluation of the Taka will ease balance of payments pressures in the medium-term, as will an expected rebound in remittances, Moody's assesses that the import coverage ratio will continue to weaken towards 3 months of imports, while current account will remain wide (around 4%) over the next few years.
Risks to reserves adequacy are heightened by uncertainties around the composition of reserves. Bangladesh Bank currently includes assets from the Export Development Fund (EDF), swap lines with the Government of Sri Lanka, and other assets with questionable liquidity as part of its official reserves. In Moody's view, reserves adequacy will be materially weaker if these assets do not meet liquidity requirements.
Bangladesh's long-standing weak fiscal revenues and rising energy costs complicates the government's immediate policy choices, with increasing subsidy costs putting pressure on the government's fiscal metrics. Moody's expects the fiscal deficit to remain wide, around 5.0-5.5% of GDP over the next few years, increasing the debt burden to above 40% of GDP. The devaluation of the Taka weakens debt affordability, with interest payments expecting to consume almost 25% of revenues. The energy crisis also exacerbates Bangladesh's weakening macroeconomic environment – with high inflation undermining consumption and slowing exports and remittances impacting growth – as energy shortages may affect garment production.
While Moody's expects that Bangladesh will continue to secure official financing through international financial institutions, with the IMF programme expected to unlock further financing, the financing options available to the government to stabilise the balance of payments remain limited. Bangladesh has no established access to international financial markets and domestic markets remain very shallow. Foreign direct investment flows are weak at 0.5% of GDP in fiscal 2022. The limited foreign exchange liquidity has also affected banks and companies operating in Bangladesh with the need of cross-border transactions. Therefore Moody's assessment of government liquidity risk has worsened.
Finally, capital flow management measures introduced by Bangladesh Bank such as increased margins against import letters of credit (LCs), increased monitoring of LCs, and import restrictions have failed to arrest the deterioration of reserves. Such inefficient measures, in addition to the implementation of unorthodox, distortive monetary policy tools such as a multiple exchange rate regime, has lowered Moody's assessment of the institution's monetary and macroeconomic policy effectiveness.
GDP per capita (PPP basis, US$): 7,044 (2021) (also known as Per Capita Income)
Real GDP growth (% change): 6.9% (2021) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.6% (2021)
Gen. Gov. Financial Balance/GDP: -3.7% (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.1% (2021) (also known as External Balance)
External debt/GDP: 19.6% (2021)
Economic resiliency: ba3
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 06 December 2022, a rating committee was called to discuss the rating of the Bangladesh, Government of. The main points raised during the discussion were: The issuer's institutions and governance strength, have materially decreased. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become less susceptible to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings would likely be confirmed at their current level if pressures on Bangladesh's external position were to ease durably, for example due to effective policy measures that would rebuild foreign exchange reserves to adequate levels and a credible financing plan to address the wide current account deficit. Additionally the implementation of fiscal reforms that would increase revenue mobilisation in particular, leading to a material narrowing of fiscal deficits in the next few years and contributed to bolstering debt affordability, would also support a confirmation of the rating.
The rating would likely be downgraded if pressures on Bangladesh's external position were to keep building, with an enduring erosion of foreign exchange reserves and uncertainty surrounding financing sources, while the energy crisis continued to put pressure on external and fiscal metrics.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Bangladesh's very highly negative (CIS-5) ESG Credit Impact Score reflects very high exposure to environmental and social risks, and weak governance which, together with low financial capacity, constraint the sovereign's ability to adjust to environmental and social risks.
The exposure to environmental risk is very highly negative (E-5). As a low-lying country with large coastal areas, Bangladesh is highly prone to flooding, which disrupts economic activity and raises social costs. Low incomes and weak infrastructure quality compound the impact of weather-related events on the economy, and in turn, associated fiscal costs. In addition, the magnitude and dispersion of seasonal monsoon rainfall also influence agricultural sector growth, generating some volatility and raising uncertainty about rural incomes and consumption. As a net energy importer, exposure and risks related to carbon transition are not present.
We assess Bangladesh's exposure to social risks as very highly negative (S-5). Low incomes stem in part from physical and social infrastructure constraints to economic development that will take time to address. That said, per capita incomes have grown strongly over the past decade and poverty rates have declined sharply, thanks to high and stable economic growth. This has also delivered improvement in access to basic services, although Bangladesh's challenges related to improvements in educational opportunities and outcomes, health and safety, and labor force inclusion remain areas of social risk.
Bangladesh's weak institutions and governance profile constrain its rating, as captured by a highly negative governance issuer profile score (G-4). Challenges in control of corruption and rule of law weaken existing institutions, while the credibility of legal structures is also limited. These governance challenges have in part contributed to asset quality issues in the banking sector. Besides, a deteriorating monetary policy framework undermines macroeconomic stability, while challenging fiscal prudence.
