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WHEN a renowned international credit rating agency such as Moody’s downgrades a country’s credit ranking or its outlook on the banking sector, it entails some consequences for the country. The agency on November 18 downgraded Bangladesh’s credit rating to B2 from B1, citing heightened political risks and lower growth. It also downgraded its outlook on the Bangladesh economy to negative from being stable as it found increased risks of political uncertainty, further decline in law and order and weak domestic demand. The agency says that the downgrade reflects heightened political risks and lower growth which increases government liquidity risks, external vulnerabilities and banking sector risks following the recent political and social unrest that led to a change in government. The assessment also says that uncertainty and weakening growth have led Bangladesh to rely increasingly on short-term domestic debt for deficit financing, raising liquidity risks. It also speaks of the sorry state of the banking sector, crippled by bad loans, weak capital and liquidity that have increased contingent liability risks for the sovereign. It says that despite improved remittance flows and loan disbursements from development partners, external vulnerability risk remains weaker because of a sustained decline in the reserve buffer over the years.

Such a downgrade, suggesting high investment risk for investors and lenders, is feared to have adverse impacts on the economy. Economists say that the consequences of such a rating are multifarious. The worst one is the erosion of confidence among foreign investors and institutions, which will make it more difficult for the country to attract foreign investment and obtain loans at reasonable rates. Foreign direct investment to Bangladesh has already dropped to a decade’s low in the 2024 financial year. The current rating may increase the cost of trading with other countries and cause further decrease in foreign direct investment as well as foreign portfolio investments. Moody’s also assesses that the ongoing dollar shortage and the decline in foreign exchange reserves will have sustained pressure on Bangladesh’s external position while the elevated levels of debt will diminish the fiscal strength. In May 2023, the agency downgraded Bangladesh’s credit rating to B1 from Ba3. In March that year, the agency also downgraded its outlook on Bangladesh’s banking sector to ‘negative’ from ‘stable’, citing a sharp rise in defaulted loans, scams, irregularities, mismanagement and a lack of good governance. Bangladesh now has the highest ratio of non-performing loans in South Asia, with nearly 17 per cent of the total loans categorised as defaulted. It was a mere 1.9 per cent in 2011.

While political stability is a must, it is also high time the government and the central bank improved financial management and brought about changes in the fundamentals of the financial system to recover from the situation. In so doing, the government and the central bank should prioritise transparency, accountability and sound management practices in the financial and banking sectors to restore investor confidence and attract foreign investment.