MOODY鈥橲 Investors Service has recently downgraded the credit rating for Bangladesh from B1 to B2 and changed the outlook for the economy from stable to negative. Credit ratings by rating agencies affect a country鈥檚 prospects for borrowing from the international capital market as well as its attractiveness for foreign investment.
The Bangladesh Bank has provided an excellent rebuttal to Moody鈥檚, citing the interim government鈥檚 bold steps to stabilise the economy, left in tatters by Sheikh Hasina鈥檚 autocratic regime. The ousted regime survived through a kleptocratic system, allowing its cronies to loot the country鈥檚 banks and commit other financial crimes, including corruption.
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鈥楳oody鈥� rating
MOODY鈥橲 credit downgrading of Bangladesh does not reflect all the positive steps that the interim government has taken since coming to power in August 2024. These include stabilising the banking sector and restoring overall confidence.
There have been wide-spread corruption and syphoning off an estimated $150 billion out of the country. The cronies of the previous government stole and took out of the country an estimated $17 billion from the banking sector alone. The interim government is taking positive steps to recover stolen wealth and put an end to financial crimes.
The interim government has also restored external debt sustainability when the previous regime borrowed irresponsibly, allowing Bangladesh鈥檚 external debt to exceed $100 billion. External debt accumulation of Bangladesh has accelerated since 2010, and the previous regime left foreign reserves at a precarious level, needing the IMF鈥檚 bailout.
The interim government has also taken actions to address growing public debt and put an end to borrowing from commercial banks. It has refrained from printing new money to finance fiscal deficit.
The interim government鈥檚 initiatives are already producing positive results. Remittance flows are rising, indicating a restoration of confidence in the economy. The country鈥檚 balance of payments situation is improving along with its foreign currency reserves. The overall inflation rate has also stabilised, even though food prices remain high, mainly due to supply-side factors.
The Bangladesh Bank is certainly right when it said, 鈥楢gainst this background, we are of the view that the change of sovereign ratings by Moody鈥檚 is tantamount to 鈥渓ooking through the rear-view mirror鈥� while the car is moving forward鈥�.听
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Credit rating agency鈥檚 poor record
MOODY鈥橲 rated Bangladesh B1 with stable outlook in May 2023, when the country was in a balance of payments crisis and under the IMF鈥檚 bailout programme. Unprecedented corruption, huge illicit transfers of funds and unchecked money laundering did not seem to bother Moody鈥檚.
In fact, credit rating agencies are well-known for political bias and conflicts of interest. They were at the centre of major financial crises, from the financial markets collapse of New York City in the mid-1970s, the Asian financial crisis of 1997鈥�1998, the Enron scandal of 2001, to the global financial crisis of 2008. All of these cost investors globally billions.
The US and EU regulators adopted a series of law reforms to address the conflicts of interest and the rating biases of credit rating agencies following their catastrophic failure and questionable roles as financial informational intermediaries during the 2007鈥�2008 global financial crisis.
The three dominant international credit rating agencies 鈥� Standard & Poor鈥檚, Moody鈥檚 and Fitch 鈥� have been accused of many faults, including false ratings, flawed methodology, encroaching on government policy, political bias, selective aggression, and rating shopping.
These shortcomings originate from their 鈥榠ssuer-pay鈥� business model. The institution being rated pays for the rating, which is used by investors. This means that the model has an inherent conflict of interest.
Yes, there have been some improvements in the conduct of the credit rating agencies since the global financial crisis. But rating agencies are still being caught on the wrong side of the law. Recent cases are proof of this.
For example, in 2023, the European Securities and Markets Authority fined the Fitch group of companies in France, Spain and the UK a total of 鈧�5,132,000 for failing to maintain independence and avoid conflict of interest. In 2018, China suspended licences held by Dagong Global Credit Rating, one of China鈥檚 biggest agencies. In South Africa, the Financial Sector Conduct Authority recently found the Global Credit Rating Agency guilty of failure to avoid a conflict of interest, and the agency was fined heavily. There is still the possibility that a great deal of wrongdoing goes undetected.
One may say that the above cases do not relate to ratings of sovereign countries. In particular, the 鈥榠ssuer-pay鈥� model does not apply to sovereign country ratings.
However, credit rating agencies are still found pro-cyclical, giving excessive weight to GDP growth rather than quality of growth, such as equity and environmental sustainability. Moreover, the subjective component of credit ratings is detrimental because it does not seem to be related to a country鈥檚 true credit risk.
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Does it matter for Bangladesh?
BANGLADESH is not a big borrower in the international private capital market 鈥� about 11 per cent of its external debt is from commercial sources. So, ratings by Moody鈥檚 or any other rating agencies do not have much implication if Bangladesh does not intend to borrow in the near future from international bond markets or commercial banks.
However, Bangladesh may come under pressure to borrow from commercial sources as it will lose access to concessional finance from official sources, such as the World Bank, when it graduates from its least developed country status and meets the World Bank鈥檚 middle-income country definition.
Yet, Bangladesh should be very careful in deciding to borrow from commercial sources. This is an important lesson from Sri Lanka鈥檚 recent debt crisis and many of the African least developed countries.
Rankings by credit rating agencies matter for foreign direct investment. Like any other LDCs, Bangladesh needs large FDI flows for its structural transformation. Downgrading of credit rating creates a negative sentiment about a country鈥檚 economic prospect and hence discourages FDI.
Therefore, the Bangladesh Bank should be congratulated for its prompt and credible rebuttal of Moody鈥檚 鈥榤oody鈥� and careless portrayal of Bangladesh鈥檚 economic outlook.
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Anis Chowdhury is emeritus professor, Western Sydney University, Australia. He held senior United Nations positions in New York and Bangkok.