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.

Zahid Hussain, a former lead economist at the World Bank's Dhaka office, said the ratings downgrade did not come entirely as a surprise since the rating agency had hinted that it was reviewing Bangladesh.

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Moody's downgrades Bangladesh's ratings to B2, changes outlook to negative

"If this hasn't come as a surprise, it has already had an impact on the market. The possibility of new impact is very low," he said. "But if it has come as a surprise to the market, it will increase the risk premium, the cost of trade finance will rise, and access to finance might become harder."

Sadiq Ahmed, vice-chairman of the Policy Research Institute of Bangladesh, said international credit ratings influence the thinking of foreign private investors.

"It will have an immediate impact on banks' international business," said Syed Mahbubur Rahman, MD of Mutual Trust Bank

"Since the flow of private capital into Bangladesh is low by global standards, there should not be any immediate effect. The interim government has already initiated important reforms in banking and anti-corruption that should give a positive signal to potential investors," he said.

"This should be strengthened with a greater focus on law and order, which is essential for a stable investment climate. Further reforms in trade and taxation and ensuring uninterrupted power supply should also help improve the investment climate."

Birupaksha Paul, a professor of economics at the State University of New York, said: "It is Moody's perspective on Bangladesh's outlook and it contains some elements of truth.

"But it's not that the interim government has done something damaging which caused the report to emerge. It reflects a continuation of the previous regime's deterioration of governance and the troubled performance of the financial sector.

"However, the interim government's vagueness in terms of financial reforms, institutional corrections, and the empowerment of the central bank is also a factor," he concluded.

Experts said international borrowing costs are also likely to rise, exacerbating the challenges facing businesses already grappling with rising expenses.

Mamun Rashid, chairman of Financial Excellence Ltd, said the impact of this is that LC confirmation charges will become more expensive as banks grow increasingly reluctant towards exposure in Bangladesh.

All private sector credit will undergo more stringent reviews, he added.

Rashid added that cross-border funding into the country, along with any new considerations for funding or exposure, will become costlier and may decline in volume.

"A political roadmap is the primary step to address this."

Investors and institutions want to know a definitive roadmap, but the tenure of this interim government remains vague, he said.

"Political roadmaps are always critical in the international political economy. Without one, foreign direct investment (FDI) will not materialise. While bilateral or multilateral aid may still come, FDI will not," he added.

On Monday, Moody's downgraded Bangladesh's rating from B1 to B2 as a result of heightened political risks, lower growth forecasts, further deterioration in law and order and weak domestic demand.

A B2 rating signifies obligations that are considered highly speculative and are subject to high credit risk.

The heightened political risks come from the absence of a clear election roadmap, the deterioration of law and order and the nascent reemergence of community-based tensions, the American credit rating agency said in a report.

The report coincides with the conclusion of the first 100 days of the interim government, which came to power after the Awami League government was ousted by a mass uprising.

However, experts opined that the downgrade would have an immediate impact on the banking sector.

"It will have an immediate impact on banks' international business, especially in export and import. It will affect international borrowing, and the cost of doing business is likely to rise," said Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank.

"The lenders I am talking to for funds will rethink whether to fund me now. Even if we get funding, it will be costlier and the size of the funding may be cut in half."

Confirmation charges and FDI may also be impacted, he added

"The remedy for this is to address the concerns raised by Moody's -- political stability, elections, and the law-and-order situation. Moreover, bringing stability to the external accounts and reducing overdue debts in the banking sector is crucial."

He said that banks' trade business has already been impacted and this rating downgrade may further raise flags.

"When an agency lowers a country's rating, the risk factor rises, and approvals get delayed."

Ashikur Rahman, principal economist at the Policy Research Institute of Bangladesh, said Moody's rating was a bit premature considering that the exchange rate has already stabilised, reserves have stopped depleting, and the Purchasing Managers' Index shows economic activity is gaining momentum.

"This will definitely complicate the interim government's effort to seek more FDI and bilateral investments from countries like China or from the West -- undermining the scope available within the economy."

Tanvir Ghani, founder of The Osiris Group, a private equity fund, and former managing director at Goldman Sachs, said Moody's downgrade correctly reflects the private sector's growing concerns with the interim government's capability to execute.

"While we remain hopeful for the future, thus far from an FDI lens, the first 100 days have delivered no tangible outcomes."

Rizwan Rahman, managing director of ETBL Securities & Exchange Ltd, said: "Foreign investors are increasingly concerned about whether investments made now will be upheld by an elected government in the future. This uncertainty risks deteriorating the investment climate and potentially leading to a downgrade in the country's ratings."