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Moody’s downgrades Bangladesh’s country grading, what's next?

Published : Saturday, 3 June, 2023 at 12:00 AM  Count : 890

Bangladesh country rating is reported to have been downgraded by Moody's to B1 from Ba3. The rating outlook is said to be stable. Moody's summary report states that Bangladesh's heightened external vulnerability and liquidity risks are persistent, and that, together with institutional weaknesses uncovered during the ongoing crisis, the sovereign's credit profile is consistent with a B1 rating. Despite some easing, ongoing dollar scarcity and deterioration in foreign exchange reserves indicate continued pressures on Bangladesh's external position, exacerbating imports constraints and as a result energy shortages.

The report notes that the government has not yet fully reversed its import control measures and unconventional policies including a multiple exchange rate regime and interest rate caps, which are creating distortions. Finally a very low level of fiscal revenues relative to the size of the economy constrain the government's policy choices and point to weakening debt affordability as higher interest payments result from the taka devaluation and short maturities for domestic debt. The report expects external financing to help alleviate pressures on the external and fiscal metrics, but external buffers will remain weaker than before the pandemic and higher debt levels will weaken fiscal strength. Moody's also expects fiscal reforms will take years to materialize, as per the report.

Moody's rating scale indicates that Ba3 is judged to be speculative, subject to substantial credit risk. On the other hand, B1 is considered to be speculative, subject to high credit risk. Basically, rating scale is of two types - first one is investment grade and another one is speculative grade.

The rating is downgraded by one notch. It does not carry weight since both are speculative in nature, in other words, these are called as junk rating. In theory, such rating is rarely of help to facilitate banks in cross border transactions. Even it does not support to promote foreign investment, since encouragement of which depends on many other factors.

Why Bangladesh goes for country rating by its own cost is an issue. Developed and many developing countries having wide bond markets are reported to be rated by rating agencies willingly. Without information on country rating, it is said that bond rating is not so easy. Bangladesh has been rated at Ba3 or its equivalent for more than a decade. General people are not aware of the inside of the rating. But it carries psychological value with the notation 'positive outlook' which seems to be just a talk.

The size of Bangladesh economy has enhanced to a larger extent in terms of gross national product during the last one and half decade. The current economic size in monetary terms is more than 450 billion US dollar. Trade volume of the country is going to exceed 150 billion US dollar. In both cases of export sector and import substitution industries, Bangladesh depends on inputs contents from external sectors. As a result, the economy needs supports from external sources. Global trade is being transformed dynamically. Trade is rarely depends on bankers' commitments like letters of credit (LCs), bank guarantees, etc. During 80s of last century, export sector of the country started flourishing with a single product - readymade garment. The product is leading export trade of the country. Earlier, exporters execute export orders received through LCs. The payments were on sight term.

For procurement of inputs, LCs on deferred terms were used. It means that settlement of import liabilities would be made out of export proceeds. Situation was changed. Most of the exports are executed presently on sales contracts, meaning that importers' banks do not make payments commitments to exporters of Bangladesh. They transfer payments to exporters' banks on receipt of the same from importers. Sales contracts are widely used instruments; Mentionable here that Bangladesh permits, regardless of value, imports of industrial raw materials and capital machinery on sales contracts with commercial imports at limited scale. Despite, Bangladeshi importers are rarely in a position to avail the scope for imports under sales contracts. Most of our imports are executed on LCs under which banks are bound to make payments on due date.

As said earlier, Bangladesh is a rising economy. It needs investment continuously. Industries both export oriented and import substitution industries need input contents from external sectors. We are not on the track for imports against sales contracts. We need LCs to be issued by local banks. These need to be confirmed by external banks at the cost of importers in Bangladesh for facilitating early payments to suppliers abroad. Bangladesh is a trade hub. Who will miss the trade train? Whether credit rating stops them to take exposure on Bangladeshi banks is a question. The rating will never be a factor. Banks need to have ability to negotiate with their correspondents abroad.

The extra cost burden can easily be removed provided that banks are ready to make payments on time. As said earlier, banks are trust sellers, among others. If the payments philosophy of banks is changed, exiting charge can also be reduced to an acceptable level. It is not easy to be on right path, it needs time.

In this case, central bank can play roles under which it needs to strengthen payments monitoring methodology so that reporting framework can identify each delayed payments immediately. It is true that payment monitoring is not the work of central bank. Despite, for the sake to safeguard incremental outflows, central bank should take the delayed issues into consideration and take immediate actions. This can make the situation smooth in settlement of payments.

Rating issue does not seem to be a news item. Despite, it is well circulated as viral. It is interesting point that many receivables against exports remain unrealized in many countries, but nothing happens in assessment of their ratings. Accordingly, the downgraded rating can never impact our cross border trade. We only need to be regular in settlement of external payments at any cost.

It is easy to say regarding payments settlement on time. There are some other issues like adequate liquidity, functioning of interbank market, etc. vital factors in this regard. As such, financing need to be tradable over the counter market or through formal exchange houses for which banking products for trade transactions like option, future, forfeiting, etc. need to be introduced in the market. Recycling of finance can smoothen the operations of payments settlement.

The writer is a contributor

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