New Delhi: American ratings agency Moody’s has cited “heightened political risks” and “lower growth” as reasons behind downgrading Bangladesh’s long-term economic rating from B1 to B2, and changing outlook from “stable” to “negative”.
The agency said these factors, exacerbated by the country’s recent political and social upheaval, had increased government liquidity risks, external vulnerabilities and also banking sector risks.
Its statement added: “With elevated social risks, the absence of a clear election roadmap, the deterioration of law and order, and the nascent reemergence of community-based tensions also raises political risk”.
Former Bangladesh Prime Minister Sheikh Hasina was ousted this August after hundreds died in a bloody crackdown on students who were protesting a quota system. The country is now run by an interim government, headed by Nobel Laureate Muhammad Yunus.
Growth forecast lowered
This is the second downgrade by Moody’s since May 2023, but the first time in 14 years that it has lowered the economic outlook from “stable” to “negative”.
The American rating agency also lowered growth forecast from 6.3 percent to 4.5 percent for the fiscal 2025 (1 July, 2024, till 30 June, 2025) due to the political uncertainty “punctuated” by “occasional lapses in law and order”—which impacts domestic consumption. The agricultural sector has also been damaged by the recent floods, Moody’s noted.
A day before Moody’s announced its downgrade, the government’s Chief Adviser Yunus indicated he may remain in office for at least 4 years, but was hopeful of holding elections earlier.
The quota system at heart of protests
Hasina resigned and fled to India on 5 August following months-long protests against the 30 percent quota in public sector employment for families of veterans of the 1971 Liberation War.
This strengthened her hold on government functioning as the liberation war was led by her father and Bangladesh’s founding leader Sheikh Mujibur Rahman.
Following similar protests in 2018, Hasina had scrapped the controversial quota but the Bangladesh High Court reinstated it this June.
The interim government has claimed that at least 753 Bangladeshis lost their lives in the last weeks of the movement following Hasina’s attempts to suppress protests.
In the aftermath of the protests, the country witnessed a spate of violence including attacks against the Hindu minority. Yunus claimed that some incidents against minority communities were due to their support for the ousted Awami League, blaming India for the “false propaganda” about religion.
Moody’s has listed the attack on minorities as one of the reasons behind Bangladesh’s lowered outlook.
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Weakening forex reserves
The rating agency also took note of declining foreign exchange reserves – from $21.7 billion in June 2024 to $19.8 billion in October 2024, which will cover imports for only 3.2 months.
“Despite the narrowing of Bangladesh’s current account deficit, supported by robust remittance flows and import restrictions, pressures on the country’s external position persist due to a sustained decline in its reserve buffer,” said the rating agency.
Its statement added: “We now expect reserves to reach approximately $20 billion by the end of 2024 and only improve in 2025 with disbursements from the IMF and other development partners.”
It noted struggling payments to energy suppliers, which would continue to add pressure on its foreign exchange reserves.
In early November, Adani Power cut electricity supply to Bangladesh over a dispute of about $800 million in unpaid bills. Dhaka had opened a $170 million letter of credit to make payments to Adani.
The rating agency also pointed to the risk of “further deterioration of law and order” that clouded the outlook for its garments sector and associated exports.
It also pointed to the fact that Bangladesh would graduate from the United Nations’ Least Developed Countries (LDC) status in 2026, which means reduction in concessional financing and loss of preferential market access. Both these have long-term implications for the country’s exports, the agency said.
“Given the negative outlook, an upgrade is highly unlikely in the near future. However, we would consider revising the outlook back to stable if we had a higher level of confidence in a recovery in the economy and broad political stability that would shore up the country’s external position and government liquidity,” said Moody’s.
(Edited by Tikli Basu)
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