Economists and bankers think the downgrading of the government and the negative rating actions against seven banks by Moody’s Investor Service will bring new challenges to Bangladesh’s economy.
They fear the cost of spending in foreign currency will rise and there will be more uncertainty in getting overseas loans while the private sector entrepreneurs may have to pay more interest.
Moody’s on Tuesday downgraded the government’s long-term issuer rating to B1 from Ba3, saying the outlook is stable but gross foreign exchange reserves will remain below $30 billion for the next two to three years.
The downgrade of the sovereign rating was driven by Bangladesh's heightened external vulnerability and liquidity risks that are persistent, and the sovereign's institutional weaknesses uncovered during the ongoing crisis as the government prepares to unveil its budget for FY24 later this week, Moody's said.
A day later, the credit rating agency lowered the long-term deposit and issuer ratings of six Bangladeshi banks while confirming the ratings for another bank.
Moody’s cut the ratings for BRAC Bank Limited, The City Bank Limited, Dutch-Bangla Bank Limited, Eastern Bank Limited, NCC Bank Limited and Premier Bank Limited while confirming the rating for Mercantile Bank Limited.
It said the outlook for the government and the banks were stable.
A credit rating is an evaluation of the credit risk of a prospective debtor, predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
FEARS
Economist Ahsan H Mansur said the Moody’s ratings will directly affect four to five sectors.
“The cost of using foreign currencies will increase for the banks. Private sector entrepreneurs will have to spend more on interest to get foreign loans,” said the executive director at the Policy Research Institute.
He said the downgrading of the sovereign means all the banks’ ratings have been downgraded by one notch automatically. The ratings of banks with reported lack of corporate good-governance will be lowered by another notch.
“The cost of foreign trade and transactions, such as issuance of LCs, foreign currency supply deals, payment for LCs through a third bank, will increase. Overall, the cost will rise in the offshore units of the banks,” said Mansur, who worked in the past as chairman of BRAC Bank.
Anis A Khan, former chairman of the Association of Bankers, Bangladesh or ABB, said the correspondent charge for Bangladeshi banks with foreign ones will increase in the wake of Moody’s actions.
“It’ll raise the cost of business for the banks. Foreign banks, the ADB, the World Bank and the IDB will increase charges for loans. They may refuse loan requests as well,” he said.
Selim RF Hussain, the incumbent chairman of ABB and managing director of BRAC Bank, said the Moody’s negative rating action means the Bangladeshi banks’ LC commission will be cut.
“Import costs will rise. The international banks will lower the ceiling of loans and trading lines.”
He hopes the rating will improve in a review by Moody’s after six months.
Mashrur Arefin, managing director and CEO of The City Bank, said they were still analysing the action taken by Moody’s. “We’re checking how much the interest on foreign loans will rise or if we face any problems in getting long-term loans. We need to highlight our positive sides now.”
Mati Ul Hasan, managing director of Mercantile Bank, said they were waiting for the decision by Moody’s after representatives of the credit rating agency visited the bank last month.
According to the Bangladesh Bank, the government’s foreign loans stood over $71.93 billion in December.
In the private sector, the overseas loans were around $24.31 billion .