Moody's Investors Service on Friday kept Bangladesh's long-term issuer and senior unsecured ratings at "Ba3" on review for downgrade.
The short-term issuer ratings are affirmed at "Not Prime" and the outlook was stable before being placed under review.
The decision to place the ratings on review for downgrade was driven by Moody's assessment that Bangladesh's deteriorating external position raised external vulnerability and government liquidity risks in a way that may not be consistent with its current rating.
This assessment also reflected governance weaknesses in the ability of institutions to take credible measures to arrest the deterioration of reserve adequacy.
While Moody's expects the agreement on the Extended Credit Facility/Extended Fund Facility and the Resilience and Sustainability Facility with the International Monetary Fund (IMF) to provide some external financing, program conditions have not been finalized, raising uncertainties around the government's ability to meet them and their economic and social impact.
Risks to reserve adequacy are compounded by uncertainty around the composition of reserves.
Bangladesh's foreign exchange reserves are declining at a rapid pace, largely driven by rising costs for energy imports and moderating growth in export earnings, Moody's said.
The rise in food and fertilizer prices has also inflated the subsidy bill for the government. While the taka devaluation and softening of some commodity prices could improve terms of trade in the medium term, Moody's expects the energy crisis to exacerbate the balance of payments and liquidity risks in the near term.
Bangladesh's financing options remain narrow due to the absence of international issuance and limited domestic capital markets, while foreign direct investments (FDIs) are very limited, according to Moody's.
Although Bangladesh has modest debt payments due to the concessional nature of its external debt with long maturities, weak debt affordability -- with interest payments absorbing a widening share of the government's narrow revenue base - poses further risks.
Meanwhile, Bangladesh's local-currency (LC) and foreign-currency (FC) ceilings have been lowered to Ba1 and Ba3 from Baa3 and Ba2 respectively.
The LC ceiling is placed two notches above the sovereign rating, reflecting weak predictability and reliability of government institutions and high external imbalances, which raise risks for the garment export sector's contributions to government revenue; balancing a relatively small government footprint.
The FC ceiling is placed two notches below the LC ceiling, reflecting low capital account openness, weak policy effectiveness, and some degree of unpredictability surrounding capital flow management, taking into account low external indebtedness.
