S&P Revises Bangladesh Outlook to Negative

S&P Global Ratings has revised Bangladesh's long-term sovereign credit rating outlook to negative from stable, citing growing risks from weaknesses in the banking sector, fiscal constraints and external challenges that could weigh on economic growth and the country's external position.

The global ratings agency affirmed Bangladesh's 'B+' long-term sovereign credit rating and 'B' short-term rating.

In a report published on Monday, S&P said it had revised the outlook because of increasing risks posed by a fragile banking sector, limited fiscal space, external headwinds and the possibility of a more prolonged economic recovery.

The agency said the outlook revision reflected the risk that Bangladesh's economic growth and external position could weaken further amid persistent financial sector imbalances, volatile global energy markets and uncertain international trade conditions.

S&P identified the banking sector as a major source of concern, citing poor asset quality and high levels of non-performing loans, particularly in state-owned banks, where the non-performing loan ratio is around 40%. It said these weaknesses could limit the sector's ability to support a stronger economic recovery.

The report also highlighted fiscal pressures resulting from a narrow tax base and rising debt-servicing costs. Government revenue remains at around 8% to 9% of gross domestic product (GDP), while interest payments account for about 30% of total government revenue. Public debt is projected to increase gradually to around 43% of GDP by fiscal year 2029.

According to S&P, Bangladesh's economic growth has slowed over the past three years, with real GDP growth expected to average 4.5% over the next three years. Per capita GDP growth has declined to 3.3%, compared with a 10-year average of 5.8%.

Despite the weaker outlook, the agency noted that Bangladesh's foreign exchange reserves had improved to US$32.9 billion in fiscal 2026, supported by strong remittance inflows, which increased by 19% during the first 11 months of the fiscal year.

However, the country's export prospects remain under pressure. S&P said the readymade garment sector, which accounts for more than 85% of Bangladesh's merchandise exports, faces weaker global demand and the impact of a new 10% US tariff introduced in July 2026.

The ratings agency expects Bangladesh's current account balance to shift from near balance to a deficit of between 1.7% and 2.2% of GDP over the next three years as import demand recovers.

S&P also said the political environment could become more stable following the Bangladesh Nationalist Party's victory in the February 2026 general election. It noted that the new government has pledged to reduce inflation, attract more foreign direct investment and increase the country's tax-to-GDP ratio.

The report added that Bangladesh is negotiating a new economic reform programme with the International Monetary Fund following the early termination of its previous arrangement. According to S&P, a new IMF-backed programme could support structural reforms and help secure continued financing from multilateral development partners.

The agency said it could downgrade Bangladesh's sovereign credit rating if economic growth fails to recover or if the country's external position deteriorates significantly, including if narrow net external debt rises above 100% of current account receipts.

It added that the outlook could be revised back to stable if Bangladesh records stronger economic growth and improves its fiscal and external indicators, including by slowing the pace of government debt accumulation.