Fitch now rates Bangladesh's foreign debt outlook negative

Fitch Ratings has reassessed Bangladesh's ability to fulfill its foreign-currency debt obligations, shifting its outlook from "stable" to "negative." 

However, Fitch has upheld Bangladesh's long-term foreign-currency Issuer Default Rating (IDR) at 'BB-', an investment-grade rating, albeit with a negative outlook. 

This change in outlook suggests that Fitch Ratings has some concerns about the country's economic situation, which may impact its ability to meet its foreign-currency debt obligations in the future.

Earlier in September 2022, Fitch affirmed Bangladesh's Long-Term Foreign-Currency Issuer Default Rating (IDR) at "BB–" with a stable outlook. In May of this year, Moody's Investors Service also downgraded Bangladesh's long-term ratings from Ba3 to B1.

Analysts and bankers said if a country's outlook is revised negatively, it may face higher borrowing costs when it seeks to raise funds in international financial markets. This can make it more expensive for the government and businesses in the country to access international capital, they said.

Another impact may be on the foreign investment as a negative credit rating outlook may mean less willingness for foreigners to invest in a country with a deteriorating credit profile. Also, this can put pressure on the currency, which can increase the cost of imported goods and potentially contribute to inflation, they said.

Zahid Hussain, a former lead economist of the World Bank's Dhaka office, told TBS that Fitch Ratings has maintained its previous position on credit. However, the 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 not enough. The report said that there are vulnerabilities, which is why it has given a negative outlook.

"This report will have an impact on the confidence of our country. Those who invest or trade in Bangladesh based on the confidence in the Bangladesh economy will have a deficit in confidence," he said.

"This will have a particular impact on trade financing in the private sector. Previously, Moody's had a negative outlook on the country's credit rating, and now this institution has given a negative economic outlook, which will have an impact on confidence."

He said that Fitch Ratings mentioned that Bangladesh has not taken enough steps to prevent the decline in reserves.

He said, "The central bank has injected a large amount of new money in the market, which has led to an increase in inflation due to the increase in liquidity. In addition, it has been seen that the foreign exchange reserves have been declining by an average of $1 billion per month in the last one year in order to keep the dollar rate stable."

Syed Mahbubur Rahman, Managing Director of Mutual Trust Bank, told TBS that this rating will not have a major 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 fix the current economy, hundi must be reduced by any means. As the dollar rate increases, hundi dealers also increase the rate. 

"Therefore, special attention needs to be paid in this case. In addition, the central bank has also taken the initiative to tighten liquidity, which I think will bring down inflation," he said.

Why this altered Fitch outlook for Bangladesh:

Increased foreign-exchange pressure: We forecast foreign-exchange reserves to stay under pressure, driven by rising imports and foreign-currency (FX) intervention by the central bank. We estimate that gross reserves fell by 19% in 9M23 to $27.3 billion, or $21.5 billion excluding the portion allocated to the Export Development Fund and Bangladesh Investment Development Fund, in line with the IMF's BPM6 standard. We estimate end-2023 FX reserve coverage of current external payments at 3.0 months, against a 'BB' median of 4.4 months, based on the reserves reported under BPM6.

FX challenges: The foreign-exchange reserve outlook is challenging, amid a still-managed exchange rate, elevated oil prices and a further relaxation of import restrictions, which will widen the current-account deficit through to 2025. It remains uncertain whether the shift to a single exchange-rate mechanism from multiple rates will stem the decline in reserves due to implementation challenges, while high inflation might prevent greater exchange-rate flexibility. We expect reserve coverage of current external payments at about 2.6 months over 2024-2025. The IMF's June-end FX reserve target was not met.

Low Revenue: Gross general government revenue/GDP is far below the 'BB' median. The IMF requires Bangladesh to improve its revenue/GDP ratio, and projects a ratio of 8.8% in the financial year ending June 2023 (FY23) and 10.3% in FY26. However, this is challenged by large tax exemptions, evasion and weak tax administration. The IMF's June-end revenue target was not met. The FY24 budget targets a deficit of 5.2% of GDP and a revenue/GDP ratio of 10%, from 9.8% in FY23. We expect a deficit of 5.3%, given our lower growth forecast of 6.5%, against the budget's 7.5%, and little revenue reform progress.

Weak banking-sector governance: We regard the health of the banking sector and its governance standards as weak, especially among public-sector banks. Official data reveals a high system gross non-performing loan (NPL) ratio of 8.8% at end-March 2023. The NPL ratio of state-owned commercial banks, at about 20.0%, is much higher than the 6.0% of private-sector banks and could rise further once forbearance measures are withdrawn. Bank capitalisation is thin relative to prevailing market risks and we believe the banking sector could be a source of contingent liability for the sovereign if credit stress intensifies.

Weak structural indicators: Bangladesh is in the 23rd percentile of the World Bank's composite governance score, against 49th for the 'BB' median. Foreign direct investment is hampered by large infrastructure gaps, although some government projects in the pipeline could bode well for investment over time. The next election is due in January 2024. Protests, led by the opposition Bangladesh Nationalist Party, demand that the Awami League resigns and a caretaker government is installed prior to the next election to ensure it is conducted fairly. Major reform progress prior to the election is low.

ESG - Governance: Bangladesh has an ESG Relevance Score of '5' for both Political Stability and Rights and the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGIs) have in our proprietary Sovereign Rating Model. Bangladesh has a low WBGI ranking in the 23rd percentile, reflecting weak rights for participation in the political process and institutional capacity, uneven application of the rule of law and a high level of corruption.

Yet, Fitch found some positive points about the Bangladesh economy:

Government debt below peer median: The government debt/GDP ratio remains below that of the 'BB' median. Our baseline assumption forecasts government debt to increase moderately to 37.2% of GDP by FY25, from 33.8% in FY22. This is significantly below the projected 51.7% of the 'BB' median. Fiscal risks include sustained fiscal slippage, the extension of forbearance measures to the banking sector and potential contingent liabilities owing to the debt of state-owned enterprises and the banking sector.

Strong growth prospects: We expect economic activity to stay strong, and forecast 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 aid of remittances, government spending, investment and continued resilience of ready-made garment exports. The sector's exports were up by 8.1% in FY23. Remittance inflows until August 2023 have remained resilient relative to the previous year.

Manageable external debt service: Bangladesh should be able to meet its external debt obligations over 2024-2025, even with lower external buffers. External debt service is low relative to peers, averaging at about 5% of current external receipts over 2023-2025, against a 'BB' median of 11%. External refinancing risk is further reduced by the external creditor composition - at 59% multilateral and 41% bilateral. We expect funding from these sources to continue. An IMF programme, agreed in January 2023, should support the external position, although this depends on meeting programme targets.