S&P revises Bangladesh outlook to negative on sustained economic risks, affirms 'B+/B' ratings

The S&P Global ratings revised its outlook on Bangladesh from stable to negative, citing the challenging period of rebalancing amid enduring weakness in the banking sector, with additional risks stemming from volatile global energy markets and trade conditions.

As per its overview, released on July 27, continued stability in Bangladesh's external accounts will depend on remittances remaining strong, a rebound in the readymade garment sector, and engagement with multilateral lenders.

The ratings agency also affirmed their 'B+' long-term and 'B' short-term sovereign credit ratings.

In its outlook, the agency wrote, “The negative rating outlook on Bangladesh reflects our view that trend economic growth and Bangladesh’s external balance sheet position could weaken further as a result of adverse conditions. These include the war in the Middle East, financial sector imbalances, and energy market vulnerabilities, which could impede a faster export and economic recovery over the next 12-18 months.”

It said Bangladesh's banking sector remains vulnerable despite stable industry risk, the agency reiterates. 

State-owned banks, holding less than 30% of banking assets, have non-performing loans of about 40%. 

Significant recapitalisation will likely require years, while limited central bank independence, weak capital markets and high inflation continue to constrain monetary policy effectiveness.

On the energy side, it said, “Bangladesh's external profile has shown resilience amid the energy market disruption driven by the conflict in the Middle East, but could see renewed pressure in the second half of 2026 if energy exports from the region continue to be impeded.”

In terms of downside scenarios, the agency says it could lower the ratings on Bangladesh if the country's long-term trend growth rate slides to levels more in line with peers of similar average income, reflecting their expectations that economic growth is unlikely to rebound much from current levels over the following two to three years.

The agency estimated per capita income at about $2,750 in the fiscal year ended June 2026, which remained one of the main constraints on their rating on Bangladesh. 

The S&P noted that Bangladesh's 10-year weighted-average real per capita GDP growth rate has fallen to about 3.3%, versus a 10-year average of 5.8% in 2022, owing to a material decline in the economy's headline growth rate. 

A continued decline in this metric would jeopardise Bangladesh's outperformance on this metric compared with global peers, and further weaken credit support.

It further said it could also lower the ratings if Bangladesh's external position worsens such that, for example, narrow net external debt surpasses 100% of current account receipts on a sustained basis.

Factors that could contribute to downward pressure include lower generation of current account receipts than expected; a higher overall current account deficit than forecasted; or a failure to materially boost foreign exchange reserves.

As an upside scenario, the S&P said it could revise the outlook to stable if Bangladesh's economic growth picks up strongly over the next three to four years, signifying that a more powerful recovery is taking hold.

“We could also revise the outlook to stable if there is a significant strengthening of Bangladesh's external and fiscal performance. Stronger external settings could include current account receipts or foreign exchange reserves rising substantially beyond our forecasts, such that gross external financing needs remain lower than 100% of current account receipts plus usable reserves on a sustained basis,” the report states.

Fiscal improvement would be indicated by significantly lower net accumulation of government debt, with a declining trend, on a sustained basis.

Considering rationale, the agency revised the outlook to negative due to the increasing risks to Bangladesh's economy posed by a weak domestic banking sector, fiscal constraints, external headwinds, and the growing prospects of a more protracted recovery. 

“Our ratings on Bangladesh reflect the economy's modest per capita income and limited fiscal flexibility owing to a combination of low revenue-generation capacity and the government's elevated interest burden.”

Evolving administrative and institutional settings represent additional rating constraints, it said.

“We weigh these factors against the Bangladesh economy's historically strong long-term growth rate and the government's moderate debt burden. Continued external financial support bolsters Bangladesh's credit profile, in our view.”

Besides, the agency recommended that the economy would also benefit from further engagement with bilateral and multilateral development partners, consistent remittances from overseas Bangladeshi workers, and solid export receipts “Bangladesh's economy faces continued challenges that could slow its ongoing recovery. This follows a political crisis in 2024, and coincides with lingering weakness in the banking sector, which is undergoing a sweeping consolidation to address poor asset quality at some of the country's banks.”

The agency highlighted that the government is working on strengthening access to key markets ahead of Bangladesh's expected graduation from its status as one of the least developed countries later this year.

“Efforts such as improving the domestic business environment and boosting competitiveness will, however, take time to implement.”

On the political side, it said a more stable political environment could help to alleviate persistently low foreign direct investment inflows and set the foundation for long-term structural reforms. 

“In our view, the country continues to face pronounced challenges, including evolving institutional settings, infrastructure deficiencies, and bureaucratic inefficiencies. Reforms to effectively address these vulnerabilities will take a longer period of time.”

According to the S&P, Bangladesh Bank's monetary and external policy reforms are helping restore external stability. 

In May 2025, it adopted a more flexible exchange rate under the previous IMF Extended Fund Facility (EFF), which the BNP government later exited before completion.

It forecasted the fiscal deficit will rise to about 4.7% of GDP, with net government debt reaching around 43% by fiscal 2029. Revenue remains low at 8%-9% of GDP, though tax reforms are expected to lift it slightly above 9%.