Bangladesh's credit rating will depend on political stability and the interim government committing to structural reforms including banking and financial sectors reform, said US ratings agency Moody's.
Moody's said Bangladesh's economy may grow 5.5 percent to 6 percent in FY25. But inflationary pressure since mid-2022 persists, which has led to a curb in domestic consumption and a decline in real wages.
It further said Bangladeshi taka lost 6.3 percent of its value against US dollar following the introduction of the crawling peg interest rate in May this year which has narrowed the gap between official and black-market dollar rates.
Moody's observation came on August 8, when the interim government led by Nobel laureate Prof Muhammad Yunus was sworn in after a mass uprising toppled the Sheikh Hasina-led government.
It further said credit ratings of Bangladesh might worsen if prolonged political or social unrest derails progress on structural reforms and dampens growth or if the interim government deviates from commitments to structural reforms.
"It is unclear whether the political and social unrest will subside following Hasina's departure or on success of the interim government headed by Yunus.
"We expect short-term disruptions in remittance and financial flows as risk-averse individuals, investors, and companies pause in repatriating or investing their capital in Bangladesh amid political uncertainty and weakening government's external position," it added.
It said a reduction in remittances would in turn reduce banks' foreign currency liquidity. The Moody's views come more than a week after S&P Global downgraded Bangladesh's long-term sovereign rating from BB- to B+ amid deadly protests over quota-based government hiring resulting in killing of some 551 people, including students.
Prolonged social unrest could continue to weigh on domestic consumption, which accounted for about 66 percent of the country's GDP in the past five years.
However, a modest recovery in merchandise exports would balance this risk in the second half of 2024. Moody's said a prolonged shutdown of businesses would weigh on their and individuals' ability to repay loans, increasing the risk of non-performing loans (NPLs).
"A loss of confidence among retail depositors, prompting them to withdraw their deposits as a safeguard against potential bank failures or economic downturns, could also strain banks' liquidity."
It said a reversal of bank reforms on tightening loan classifications to accelerate NPL recognition from 2024 or reduced reform momentum to strengthen the banking sector would be credit negative for Bangladesh's banking system.
Moody's said the government has made progress over the past year on structural reforms to address external vulnerabilities and liquidity risks despite a structurally weaker external position with lower reserve buffers as well as high inflation and youth unemployment.
Citing the disbursement of the third tranche of IMF's $4.7 billion loan in June this year, it said Bangladesh's progress included implementation of a formula-based fuel price adjustment mechanism for petroleum products.
It also include liberalisation of reference lending rate, tightening of banks' overdue loan classifications and introduction of a crawling peg regime which is a transitional step towards greater exchange-rate flexibility to restore external resilience."
The US ratings agency also said the monthly current account balance went into a surplus since the beginning of the year because of import restrictions.
