Fitch Rating: Fitch Downgrades Bangladesh To ‘B+’; Outlook Stable

Fitch Ratings has downgraded Bangladesh’s Long-Term Foreign-Currency Issuer Default Rating on Monday to ‘B+’ from ‘BB-‘ owing to weakening of Bangladesh’s external buffers.

The country’s forex reserves are down substantially due to continued forex interventions, capital outflows and persistent use of informal channels for remittances. Bangladesh’s reserves have fallen by 15% from January 2024 levels to USD18.4 billion, said the agency in a report.

Domestic US dollar scarcity has resulted in effective import restrictions in Bangladesh, as authorities manage allocation of forex, said the report.

The agency expects high inflation to persist in Bangladesh due to domestic supply shortages, import restrictions and a weaker exchange rate. Inflation in FY24 averaged 9.7%, far above the Bangladesh Bank’s target of 7.5%, despite a 200bp hike in the policy rate.

Fitch said Bangladesh’s medium-term growth outlook is favourable, supported by a well-established ready-made garment sector, demographic dividend and stable remittance inflows.

However, weak banking sector credit metrics – asset quality, capitalisation and governance standards, especially those of public-sector banks are matters of concern. The sector’s non-performing loan ratio was 9% at end-December 2023, while that of state-owned banks was about 21%.

Bangladesh’s low general government revenue to GDP ratio is a long-standing fiscal weakness. Revenues continue to underperform budget targets owing to prevailing tax exemptions, weak tax administration and challenges in implementing tax reforms, said the report.

Fitch said the Stable Outlook reflects mitigation of external refinancing risks by a favourable external creditor composition, IMF-programme reforms to improve macroeconomic stability and address banking sector weaknesses, moderate government debt and favourable medium-term growth prospects.