S&P lowers Bangladesh's outlook to negative, credit rating unchanged

S&P Global Ratings lowered the long-term rating outlook for Bangladesh to negative from stable, citing weakened liquidity position and risks of current domestic political conditions which may undermine the predictability of future policy responses.

However, the rating agency kept the country's sovereign credit rating unchanged at 'BB-' for long-term and 'B' for short-term, according to the latest assessment released on 25 July.

A negative outlook reflects the risk that its external liquidity position could deteriorate further over the next 12 months and the country's credit rating may go lower if its external position worsens further.

"We may lower the ratings on Bangladesh if net external debt or liquidity metrics worsen further, such that narrow net external debt surpasses 100% of current account receipts, or gross external financing needs exceed 100% of current account receipts plus usable reserves, on a sustained basis," said the S&P assessment.

"Lower generation of current account receipts than we expect, a higher overall current account deficit than we forecast, or a failure to materially boost foreign exchange reserves would indicate downward pressure on the rating."

Dr Zahid Hussain, former lead economist of World Bank Dhaka Office, said the rating agency did not lower the credit rating, which is good for the country. However, the outlook negative means there is a risk of lowering the rating if the external position is not improved.

At present, the total external debt stands at $95 billion as of March and the usable foreign exchange reserve is nearly $20 billion. If the reserve amount is deducted from external debt, the narrow external debt is $75 billion, he said.

If the current account receipts are considered, it will also be nearly $75 billion including export, remittance and service income. As a result, narrow net external debt remains below 100% of current account receipts.

However, the real danger is the continuous drawdown of the reserve, he said and opined that it will be a matter of time to downgrade the country rating if exports face any external shock and current account inflows did not improve.

The rating agency said, "We may revise the outlook to stable if Bangladesh materially improves its external position, which would likely be indicated by a substantial increase in foreign exchange reserves combined with a modest current account deficit, and healthy growth in current account receipts."

However, the country's foreign exchange reserve continued to slide in the last one year amid higher outflow than inflow of foreign currency in the financial account.

The gross reserve stood at $23.44 billion as of 19 July which was above $39 billion as of the same date last year, according to Bangladesh Bank data.

The lower rating constrains borrowing ability of banks from foreign sources, said Selim RF Hussain, managing director of BRAC bank.

He said credit risk managers in foreign banks limit the credit limit, and sometimes withdraw the limit for banks based on the credit rating assessments of global rating agencies.

Bangladeshi banks have already been facing such difficulties after Moody's downgraded the credit rating of the country, he said.

However, S&P kept the credit rating unchanged which is good but the negative outlook will drive up the borrowing cost further for local banks, added Selim RF Hussain.

Global lenders are already aware of the external pressure on Bangladesh but when a rating agency lowers the rating, it becomes an official confirmation of the dollar crisis, said Syed Mahbubur Rahman, managing director of Mutual Trust Bank.

He said rating impacts borrowing negotiations with foreign partners.

Though the dollar balance in foreign currency accounts abroad has been improving, it is not enough to mitigate banks' needs.

The government could not make payments for LNG and coal imports, which reflects that dollar availability did not come back to normalcy, he added.  

Bangladesh Bank data shows that the dollar liquidity of banks improved to $3.7 billion in recent times, which had dipped to $2 billion last year.

Earlier in May, Moody's Investors Service downgraded Bangladesh's rating, but it keeps 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 downgraded Bangladesh's rating for the first time, placing it at B1 from the Ba3 category.

The latest assessment came due to heightening external vulnerability and liquidity risks amid a deterioration in foreign exchange reserve, which indicates continued pressure on Bangladesh's external position, exacerbating import constraints, and, as a result, energy shortages.

Except for Pakistan and Sri Lank, Bangladesh is the only one among other South Asian nations which is getting a lower rating from global rating agencies amid severe foreign currency liquidity pressure.

Though Pakistan and Sri Lank are considered exceptional cases because of their domestic political issues. Of them, Sri Lanka has been witnessing its reserve situation improving from the bottom.

India, with its credit ratings stable, is in a good reserve position even in this global crisis.

Concern over domestic political situation

When Bangladesh's overall economy is under pressure, domestic political conditions became another concern with the national election approaching and S&P in its latest assessment report addressed the risk of political situation.

"Bangladesh's highly concentrated political landscape may constrain the effectiveness of institutions and limit checks and balances on the government," said the rating agency.

"Bangladesh's highly concentrated domestic political conditions may undermine the predictability of future policy responses. The confrontational stance between the ruling Awami League and opposition Bangladesh Nationalist Party (BNP) reflects the deep division between the historically prominent political parties. Bangladesh's foreign direct investment has remained persistently low, given the country's evolving institutional settings, infrastructure deficiencies, high levels of perceived corruption, and uneven business environment."

It stated, "The political landscape in Bangladesh remains polarised, with considerable power centered with the ruling Awami League. The opposition's representation in parliament remains extremely small, limiting checks and balances on the government. Bangladesh will hold parliamentary elections in January 2024, though it is currently unclear whether the BNP will participate."

The S&P in its report said Bangladesh's economy is likely to expand at 6.0%-6.4% over the next three years, reflecting a slight moderation compared with the growth trend of its long-term average real GDP.

"Bangladesh's economy is moderating following two years of fast growth. As higher inflation, interest rates, and policies aimed at managing imports continue to bite, domestic demand growth will likely remain modest in comparison to the long-term trend. We estimate that Bangladesh's economic growth slowed to 5.5% in fiscal 2023, versus 7.1% the previous year, as the aforementioned challenges cooled domestic consumption and investment activity.

"Soft external demand conditions are likely to persist for at least the remainder of 2023, with a gradual recovery set to take shape from 2024.

Against a weaker external backdrop, domestic demand conditions in Bangladesh are also likely to remain subdued as a weaker Bangladeshi taka (BDT) and elevated commodity prices undermine purchasing power.

"Modest per capita income, which we estimate at less than US$2,700 for fiscal 2024, remains one of Bangladesh's main rating constraints. This level of per capita income limits the fiscal and monetary flexibility needed to respond to exogenous shocks."

Bangladesh's external profile remains under pressure

"Bangladesh's external profile remains under pressure despite the introduction of the landmark IMF funding facilities, and a notable decline in imports over recent quarters," said the rating assessment report.

"In January 2023, Bangladesh agreed to a 42-month Extended Credit Facility and Extended Funding Facility (ECF/EFF), as well as a Resilience and Sustainability Facility with the IMF. Total funding under the three facilities will amount to US$4.7 billion over the course of 42 months from the date of the agreement. The ECF/EFF programs will emphasise reforms to rebuild Bangladesh's diminished external buffers, and to strengthen the management of its public finances," it added.

"We view the programs as an important anchor for stabilising Bangladesh's external position, which has deteriorated over the past 18 months and continues to experience net financial outflows," read the assessment.   

"Bangladesh's central bank is fighting rising inflationary pressures, even as price pressures in the global economy begin to cool. Inflation fell slightly to 9.7% year on year in June 2023, versus 9.9% in May, but well above the 7.6% rate observed in June 2022. Since 2015, inflation has generally remained below 6% annually, it may take some time to return inflation to that level as the impact of the depreciation of the taka continues to work its way through the economy."