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Political unrest may lead Bangladesh to negative credit rating

  • Published at 02:31 am April 26th, 2013
Political unrest may lead Bangladesh to negative credit rating

Global rating agency Moody’s Thursday apprehended that the prolonged political unrest might lead Bangladesh to earn negative rating, deterring investment and disrupting economic growth.

The forecast emerged in the wake of spiraling political standoff and a series of strikes the country facing since February this year. Bangladesh achieved a stable sovereign outlook of Ba3 for the third consecutive year.

Analysts say negative rating might put adverse impact over the issuance of sovereign bond by the government by June this year and on getting foreign loan by the private sector.

Escalating political tensions in the run-up to parliamentary elections - due between October 2013 and January 2014 - are a deterrent to investment and are disruptive to economic growth, says Moody's Investors Service in its latest report titled "Credit Analysis: Bangladesh".

It report, however, did not forecast that the political strife would spiral out of control, but said Moody's would view prolonged unrest as credit negative.

Pointing fingers at Hall-Mark loan scam, it said Bangladesh's governance weaknesses became more apparent in the past year as seen in the World Bank's withdrawal of funding for the Padma Bridge project in June 2012 and a state-owned Sonali Bank's misappropriation of funds a few months later.

The incident involving Sonali Bank highlighted the weak governance structure of state-owned commercial banks and prompted the government to significantly tighten the regulatory framework to prevent the recurrence of such incidents, said Moody’s.

Finance adviser to the last caretaker government Mirza Azizul Islam said Moody’s assessment is quite normal under the present situation.

“If you look at the state-owned banks and some private banks, which is important element for the financial sector, they have recently been plugged by credit fraudulence and scam. This leads to rise in classified loan and deficit in provisioning of the banks over the last several months,” he said.

On the other hand, he added, the real sector is also passing critical moment while imports and investments were continuously declining due to series of strikes, and poor governance in Padma Bridge works has also been seen.

“These are the ominous sign for negative rating,” said the economist. If rating is negative, uncertainty might surface in subscription for sovereign bond and the interest rate of the bond might increase, he added.

“Another point is that recently we have seen growing trend of external credit by the private sector. Such credit might be costly,” he said.

Minister AMA Muhith recently said the government is going to float ‘sovereign bond’ by June this year for various purposes, including the construction of the Padma Bridge with internal resources. The government planned to raise $1bn through issuance of sovereign bond at 5.5% interest rate.

Moody’s in its report also said Bangladesh's Ba3 rating and stable outlook reflect Moody's assessment of four factors: its "low" economic, institutional and government financial strengths, as well as its "low" susceptibility to risks from financial, economic and political events.

Macroeconomic stability was regained in 2012 as seen in the shift in the current account back to surplus and the decline in inflation. However, persistent labor disruptions and bank stability pose risks going forward, it said.

Importantly, the International Monetary Fund's Extended Credit Facility (ECF) approved in March 2012 is providing a framework for prudent policies, it said. “The government has passed two major pieces of legislation -- the Bank Companies Act, which aims to enhance the mandate of Bangladesh Bank, the country's central bank; and a landmark revision to the VAT law.”

The rating also incorporates economic, government financial and institutional weaknesses. “A key risk flagged over recent months is the poor financial performance of state-owned commercial banks, primarily due to governance limitations.”

However, recent developments have prompted significant tightening of the regulatory framework, and some prudential measures have been taken that could limit contagion effects, according to the report.