Moody’s revises Bangladesh outlook to stable from negative

Moody’s Ratings has revised Bangladesh’s sovereign outlook to stable from negative, citing easing political and external pressures, stronger foreign exchange reserves and record remittance inflows.

In its latest assessment released on Tuesday, the rating agency affirmed Bangladesh’s long-term issuer and senior unsecured ratings at B2 and its short-term issuer ratings at Not Prime. It said the risks that had prompted the negative outlook had become more balanced at the B2 rating level.

Moody’s said the post-election transition and the government’s strong mandate had reduced the risk that political uncertainty would derail economic reforms.

Bangladesh’s external position has also strengthened, supported by higher foreign exchange reserves, a more flexible exchange rate regime and record remittances that have helped offset rising energy import costs, it said.

Continued engagement with the International Monetary Fund and other international financial institutions remains an important anchor for external financing and reforms, although discussions are still under way over the terms of a successor IMF programme.

Bangladesh’s foreign exchange reserves rose to around $32.9 billion by mid-2026, equivalent to more than four months of import cover, from about $21.4 billion at the end of 2024.

Moody’s attributed the improvement to record remittances increasingly flowing through formal banking channels, a more flexible exchange rate regime and the removal of earlier market distortions.

The agency expects economic growth to recover gradually. Real GDP growth rose to 4.1% in FY2026 from 3.5% in FY2025 and is projected to reach 4.3% in FY2027 before accelerating to around 4.9% from FY2028 as investment and industrial activity normalise.

Inflation, however, is expected to remain around 9% before easing gradually.

Despite the improved outlook, Moody’s retained Bangladesh’s B2 rating, citing the country’s narrow revenue base, weak debt affordability and significant vulnerabilities in the banking sector.

The agency said reforms had revealed system-wide non-performing loans of around 32.8%, while banks would require recapitalisation equivalent to around 10% of GDP to restore regulatory capital adequacy.

Such a requirement could place a significant burden on the government because of limited fiscal space and growing reliance on domestic bank financing, Moody’s said.

Banking-sector liquidity has remained stable, with system-wide deposits growing by around 12% year-on-year to March 2026. This suggests the sector’s main weakness is solvency rather than liquidity, according to the agency.

Moody’s said Bangladesh has one of the narrowest government revenue bases among rated sovereigns, limiting its fiscal flexibility.

Interest payments absorb close to 30% of government revenue, although government debt remains relatively moderate at around 40% of GDP.

The agency expects debt to rise gradually over the medium term because of persistent primary deficits and potential costs associated with supporting the banking sector.

Continued access to concessional financing should nevertheless help contain borrowing costs and refinancing risks, it said.

Energy supply constraints remain a risk to Bangladesh’s growth prospects, Moody’s said.

A recent disruption at an LNG import terminal exposed vulnerabilities in the country’s energy supply system and caused shortages affecting power generation, industry and fertiliser production.

The agency also warned that Bangladesh’s graduation from least-developed-country status in the coming years could put pressure on export competitiveness and access to concessional financing.

The ready-made garment sector is expected to remain a key pillar of exports, supported by Bangladesh’s competitive position. Sustained structural reforms, however, will be needed to realise the country’s longer-term growth potential.

Moody’s said faster-than-expected progress in addressing banking-sector weaknesses, stronger revenue mobilisation, and improvements in institutions and policy effectiveness could create upward pressure on the rating.

Conversely, a material crystallisation of banking-sector liabilities on the government’s balance sheet, a weaker growth or fiscal outlook, reduced access to external financing or renewed political instability could put downward pressure on the rating.