Why Moody’s downgraded Bangladesh’s economic outlook

Subhasish Mitra (Wide Angle)

The negative outlook projected in Moody's latest rating on Bangladesh economy reflects downside risks to the country's growth outlook beyond current expectations, which could further strain the country’s already weak fiscal position and exacerbate external vulnerabilities.

 

These risks stem from weaker domestic demand and supply disruptions due to recent protests and disruptions to law and order that cloud the export outlook and lower prospects for the ready-made garments sector, the US credit rating agency said in a report.

 

Moody's downgrade of Bangladesh's economic outlook from stable to negative is expected to have limited immediate impact on the economy, but may affect international trade for banks, leading to higher costs for letters of credit (LCs) and more stringent reviews of private sector credit, experts stated.

 

While the interim government remains committed to a broad reform agenda, its capacity to execute remains uncertain, Moody’s said. Inflation will remain elevated, prompting Bangladesh Bank to maintain a tight monetary policy stance, which will likely weigh on consumption.

 

The Moody’s Ratings downgraded its outlook on the Bangladesh economy to negative from stable owing to heightened political risks and lower growth forecasts following the recent political and social unrest that led to a change in government.

 

It cut Bangladesh’s ratings from B1 to B2 considering increased government liquidity risks, external vulnerabilities and banking sector risks. Moody’s also lowered Bangladesh’s growth projections to 4.5% from 6.3% for Fiscal Year 2025 and to 5.8% from 6.0% for Fiscal Year 2026.

 

According to Moody’s, Bangladesh’s political risk has increased following the recent social unrest that led to the resignation of former Prime Minister Sheikh Hasina and the subsequent introduction of an interim government led by Nobel laureate Muhammad Yunus.

 

“Execution risk for reforms under the current IMF program has increased, while the lack of a clear election roadmap introduces uncertainty around the longer-term commitment to reform,” said the Moody’s report.

 

Furthermore, political capital to push through challenging reforms could diminish if the interim government cannot swiftly meet social demands, including taming inflation and addressing high unemployment.

 

Hasina was ousted this August after hundreds died in a bloody crackdown on students who were protesting a quota system.

 

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.

 

Despite improving remittance flows and loan disbursements from development partners, external vulnerability risk remains weaker due to a sustained decline in the reserve buffer of Bangladesh over the past years.

 

“Given that inflationary pressures are largely driven by supply-side factors, such as supply chain disruptions and high domestic food prices, we expect monetary policy effectiveness to be limited. This is further compounded by the structurally weak policy transmission mechanism in Bangladesh," said Moody’s.