Rising political tension in the run up to the general election may result in downgrading Bangladesh’s credit ratings, warned the global credit rating agency Moody’s Investors Service.
Moody’s discusses several scenarios in a credit focus titled “Bangladesh: Weak Governance and Political Tensions Constrain Sovereign Creditworthiness” released on Friday.
In the last four years, the agency rated Bangladesh as ‘Ba3 stable’ a rating that indicates the presence of speculative elements and significant credit risks.
In the latest analysis Moody’s says political tensions and weak governance in Bangladesh, particularly in the run-up to the parliamentary elections due early next year, are credit constraints.
“Although macro variables have remained relatively unaffected so far, we have seen that prolonged political turmoil and weak governance in other countries are ultimately detrimental to investments, exports, aid flows, and therefore growth,” it said.
Since Bangladesh’s previous electoral cycles were also accompanied by an increased incidence of strikes and protests in the year before elections, Moody’s warns that this time there are newly emerging factors that may lead to increased strains on the sovereign’s credit profile.
The first factor noted is of election dynamics becoming more challenging this time owing to the abolition of the neutral caretaker government system and the emergence of Islamist forces in an otherwise secular state.
Second it notes how weak governance could have economic consequences, with the spate of industrial accidents, particularly surrounding the garment industry, which have dented the country’s reputation as a low-cost garment producer.
It said the government’s lax oversight of worker safety has lead to the industry being subjected to intense international scrutiny, leading to the US suspending albeit with a limited scope trade benefits to Bangladesh. Moody’s warns if the European Union ratchets up sanctions as well then export growth could suffer.
As the elections approach, political tensions are likely to rise, and Moody’s envisages three scenarios, with the first two weighing heavily on the sovereign credit profile: The first scenario involves unresolved political differences remaining, to the extent that the military is forced to intervene, thereby delaying the electoral process and prolonging political uncertainty, which will undermine foreign investment and economic growth.
In the second scenario, elections are held, but tensions continue unabated. It says that even if elections are held on schedule, but continued strikes and political tensions would probably weigh on investors’ decisions and adversely affect economic growth.
Moody’s notes the lack of a permanent solution to the electoral mechanism suggests that escalating tensions and violent protests would resume in the next election cycle.
The final scenario assumes a mutually agreeable electoral process that is accepted by both parties. This would be credit neutral, as it would lead to a more stable political situation with limited event risks factors that are incorporated into the Ba3 sovereign rating.
A study by the Dhaka Chamber of Commerce and Industry estimates that general strikes have resulted in the economy losing as much as $200m per day, or 0.2% of GDP a significant setback for an emerging economy like Bangladesh.
So far, political unrest has not had a visible impact on macro variables, but it is expected that growth in FY2014 will be marginally lower at 5.8% year-on-year than the central bank’s estimate of 6.2%, while the government’s budgeted estimate factors in growth at 7.2%.
The Readymade garment industry is the mainstay of Bangladesh’s economy, accounting for nearly 80% of its exports and employing more than three million people. In November last year, fire at a garment factory lead to the death of 111 workers, and this April, a building with four garment factories collapsed in Savar claiming 1132 lives, all of which damaged the country’s reputation globally.
