In a recent announcement, Moody’s Investors Service downgraded Bangladesh’s long-term credit ratings from B1 to B2, while also changing the country’s outlook from ‘stable’ to ‘negative.’ This decision underscores significant concerns regarding political risks and a slowdown in economic growth, which in turn heightens the Government’s liquidity risks and exposes external vulnerabilities.
According to Moody’s, the downgrade is primarily attributed to the recent political and social unrest that has disrupted governance and led to changes in leadership. The agency highlighted that the ongoing political uncertainty is forcing Bangladesh to increasingly depend on short-term domestic debt to finance its budget deficits, thereby raising liquidity risks for the Government. Furthermore, the country’s banking sector is facing amplified asset quality risks, coupled with inherently weak capital and liquidity levels, which further escalate contingent liability concerns for the sovereign.
The report acknowledges some positive developments, such as improving remittance flows and increased loan disbursements from international development partners. However, it stresses that the external vulnerability risk remains critical, particularly due to a persistent decline in Bangladesh’s foreign reserve buffer over the past few years.
One of the key areas impacted by the current political climate is Bangladesh’s renowned ready-made garment (RMG) sector, which is a vital contributor to the nation’s economy. The ongoing social unrest and a lack of safety and order have raised alarms about potential supply chain disruptions, which could cloud the export outlook and dampen growth prospects for this crucial industry, which employs millions of workers.
Moody’s noted that while the interim Government has expressed commitment to a broad reform agenda aimed at stabilising the economy, its capacity to effectively implement these reforms remains uncertain. The agency warned that the political capital to enforce challenging reforms, including measures to control inflation and tackle rising unemployment, may erode if swift and tangible results are not delivered.
With the absence of a clear election roadmap and an escalation of community-based tensions, the outlook for Bangladesh’s economy, especially within the RMG sector, remains precarious. The potential for weaker domestic demand and continuing unrest poses serious challenges that could further strain the country’s fiscal position and exacerbate existing external vulnerabilities.
