Fitch Ratings has reassessed Bangladesh’s ability to meet its foreign currency debt obligations, shifting its outlook from ‘stable’ to ‘negative’.
However, Fitch Ratings has affirmed Bangladesh’s long-term foreign currency issuer deficit rating at ‘BB-‘, an investment grade rating, albeit with a negative outlook.
This change in outlook indicates that Fitch Ratings has some concerns about the country’s economic situation, which could affect its ability to meet its foreign currency debt obligations in the future.
Earlier in September 2022, Fitch Ratings affirmed Bangladesh’s long-term foreign currency issuer default rating (IDR) at ‘BB–’ with a stable outlook. In May this year, Moody’s also downgraded Bangladesh’s long-term rating from Ba3 to B1.
If a country’s outlook is revised negatively, it may face higher borrowing costs when it seeks to raise funds in international financial markets, analysts and bankers said. This could make it more expensive for the country’s government and companies to access international capital, they said.
Another impact on foreign investment may be that a negative credit rating outlook may mean less willingness for foreigners to invest in a country with a deteriorating credit situation. This could also put pressure on the currency, which could increase the cost of imported goods and possibly contribute to inflation, they said.
Zahid Hussain, former chief economist at the World Bank’s Dhaka office, told TBS that Fitch Ratings maintained its previous stance on credit. However, the future outlook has changed from stable to negative, which will create a deficit in the country’s reputation.
He said that the decline in foreign exchange reserves and the exchange rate policy adopted by the Bangladesh Bank are the main reasons for the negative outlook. In addition, the amount of foreign aid received was insufficient. The report said there were weaknesses, which is why it gave a negative outlook.
“This report will have an impact on the confidence of our country. Those who invest or trade in Bangladesh on the basis of confidence in the Bangladeshi economy will suffer from a lack of confidence,” he said.
“This will have a particular impact on trade financing in the private sector. Previously, Moody’s had a negative forecast on the country’s credit rating, and now this institution has given a negative economic forecast, which will have an impact on confidence.”
He said Fitch Ratings said Bangladesh had not taken sufficient steps to prevent a decline in reserves.
He said: “The central bank has pumped a large amount of new money into the market, which has led to increased inflation due to increased liquidity. In addition, it has been noted that foreign exchange reserves have decreased by an average of one billion dollars per month in the past year in order to maintain Stability of the dollar price.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, told TBS that this rating will not have much impact on the banking sector because Moody’s has already given a negative credit rating and this institution has simply echoed the same.
He said that in order to reform the current economy, the hundi must be reduced by any means. As the price of the dollar rises, Hong Kong traders also increase the price.
“Therefore, special attention should be paid to this situation. In addition, the central bank has also taken an initiative to tighten liquidity, which I believe will reduce inflation,” he said.
Why did Fitch change this forecast for Bangladesh:
Increased foreign exchange pressure: We expect foreign exchange reserves to remain under pressure, driven by rising imports and central bank foreign exchange intervention. We estimate that total reserves fell by 19% in the first nine months of 2023 to $27.3 billion, or $21.5 billion excluding the portion allocated to the Bangladesh Export Development Fund and Bangladesh Investment Development Fund, in line with the IMF’s BPM6 benchmark. We estimate end-2023 foreign exchange reserve coverage for current external payments at 3.0 months, versus an average ‘BB’ of 4.4 months, based on reserves reported under the sixth edition.
Foreign exchange challenges: Foreign exchange reserve projections represent a major challenge, amid continued exchange rate management, rising oil prices, and further easing of restrictions on imports, which could lead to a widening of the current account deficit until 2025. It remains uncertain whether the shift to… Single exchange is uniform or not. A multiple interest rate mechanism would halt a decline in reserves due to implementation challenges, while higher inflation might prevent increased exchange rate flexibility. We expect the reserve to cover current external payments by approximately 2.6 months over the period 2024-2025. The foreign exchange reserve target set by the International Monetary Fund for the end of June was not met.
Low revenue: Total general government revenue/GDP is well below the “BB” average. The IMF requires Bangladesh to improve its revenue-to-GDP ratio, and expects it to reach 8.8% in the fiscal year ending June 2023 (FY2023) and 10.3% in FY2026. However, this faces the challenge of In large tax breaks, evasion and weak tax administration. The revenue target set by the International Monetary Fund at the end of June was not met. The FY24 budget targets a deficit of 5.2% of GDP and a revenue-to-GDP ratio of 10%, from 9.8% in FY2023. We expect a deficit of 5.3%, given our low growth expectations of 6.5%, compared to 7.5% in the budget. and little progress on revenue reform.
Weak governance of the banking sector: We consider that the health of the banking sector and its governance standards are weak, especially among public sector banks. Official data reveal that the proportion of total non-performing loans rose to 8.8% at the end of March 2023. The proportion of non-performing loans in state-owned commercial banks, at around 20%, is much higher than the 6% in the private sector. Banks could rise further once relief measures are withdrawn. Banks’ capitalization is weak compared to prevailing market risks, and we believe that the banking sector could be a source of contingent liabilities for the country if credit pressures intensify.
Weak structural indicators: Bangladesh is ranked in the 23rd percentile of the World Bank’s overall good governance score, compared to the 49th percentile for the “BB” average. Foreign direct investment is hampered by significant gaps in infrastructure, although some government projects under implementation could bode well for investment over time. The next elections are scheduled to be held in January 2024. The protests, led by the opposition Bangladesh Nationalist Party, are demanding the resignation of the Awami League and the formation of an interim government before the next elections to ensure they are conducted fairly. Significant progress on reform before the elections is low.
ESG – Governance: Bangladesh received a score of “5” in terms of ESG importance for political stability, rights, rule of law, institutional and regulatory quality, and anti-corruption. These scores reflect the high importance that the World Bank’s governance indicators have in our sovereign rating model. Bangladesh has a low ranking in the World Bank Business Indicator (WBGI) at 23rd percentile, reflecting weak rights to participate in the political process and institutional capacity, uneven application of the rule of law and high level of corruption.
However, Fitch found some positive points about Bangladesh’s economy:
Government Debt Below Peer Average: The government debt-to-GDP ratio remains below the “BB” average. Our baseline assumption expects government debt to rise moderately to 37.2% of GDP by FY25, from 33.8% in FY22. This is well below the expected 51.7% for the BB average. Financial risks include continued financial slippage, the extension of forbearance measures to the banking sector and potential contingent liabilities due to debts of state-owned enterprises and the banking sector.
Strong Growth Prospects: We expect economic activity to remain strong, and expect GDP growth of 6.5% in FY24 and 7.1% in FY25. Growth is likely to remain broad-based; Supported by private consumption with the help of remittances, government spending, investment and continued resilience of ready-made garment exports. The sector’s exports rose by 8.1% in fiscal year 2023. Remittance inflows until August 2023 remained resilient compared to the previous year.
Manageable external debt service: Bangladesh should be able to meet its external debt obligations during 2024-25, even as external reserves decline. External debt servicing is low compared to its peers, averaging around 5% of current external revenues over the period 2023-2025, versus a BB average of 11%. External refinancing risk is further reduced by the composition of external creditors – 59% multilateral and 41% bilateral. We expect funding from these sources to continue. The IMF program, agreed in January 2023, is supposed to support the external position, although this depends on achieving the program objectives.