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

The S&P Global ratings has revised its outlook on Bangladesh from stable to negative, citing the economy faces a 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 revised its long-term rating outlook on Bangladesh to negative from stable while also affirmed their 'B+' long-term and 'B' short-term sovereign credit ratings.

In its outlook, the agency writes, “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.”

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.

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 we expect; a higher overall current account deficit than we forecast; 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 says, “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 recommends 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 from Bangladesh's globally competitive garment manufacturing sector.

The S&P also highlights the country’s institutional and economic profile stating that economic recovery has been hampered by the banking sector and energy challenges.

It says, Bangladesh's economy decelerated meaningfully over the past three years, and myriad challenges to its recovery persist. Annual growth could average around 4.5% over the next three years amid domestic banking sector weakness, energy market uncertainties, and an uncertain readymade garments market.

Bangladesh's elections in February 2026 yielded a strong mandate for the BNP-led government,the S&P report went on to say. “This could support more stable policymaking conditions going forward, which will be a key determinant of the government's ability to adopt effective reforms.

“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.”

Inflation also remains elevated amid the energy market dislocation, it notes, adding, “This could put the brakes on a stronger recovery in private consumption growth, as incomes are stretched by elevated fuel and electricity prices.”

Modest per capita income, which the agency estimated at about $2,750 in the fiscal year ended June 2026, remains one of the main constraints on their rating on Bangladesh. The country's strong underlying growth has historically helped to mitigate this weakness, it says.

However, the S&P notes 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.

Bangladesh's garment industry remains highly competitive, with low unit labour costs and an ample supply of labour, the agency mentions. However, mixed external demand conditions continued to weaken readymade garment exports in fiscal 2026 (ended June 30), with total exports in this apparel category falling by 2.6% year on year in the first eleven months of the fiscal year.

The agency also highlights 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.”

According to the agency, the US tariff policy to be applied to Bangladesh remains in flux. On July 24, 2026, the US introduced new tariffs on a variety of economies, including Bangladesh, which will be subject to a 10% tariff rate on most goods exports to the US Bangladesh's export profile is highly concentrated in the readymade garments sector, which represents more than 85% of merchandise exports.

From January to March 2026 period, 18% of Bangladesh's exports were to the US, and about 86% of these were readymade garments, excluding leather products and other textiles.

“Bangladesh's 2026 general elections delivered a strong mandate for the BNP, which returned to government following two decades in the political opposition. The relatively smooth election process and formation of government, following a period of political disruption and uncertainty, could support a return to more stable policymaking conditions in Bangladesh. The new government has pledged to boost foreign direct investment, increase the tax-to-GDP ratio to 10% over the medium-term, manage inflation, and emphasize investment into infrastructure,” the agency states.

A more stable political environment could help to alleviate persistently low foreign direct investment inflows and set the foundation for long-term structural reforms, the S&P notes. “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.”

Regarding flexibility and performance, the agency notes that continued external improvements hinge on energy market and multilateral support, and that the banking sector and fiscal reforms are key for broader stability.

“We expect the gradual accumulation of foreign exchange reserves to continue even as Bangladesh's current account transitions into a moderate deficit position. Downside risks could emerge if energy prices remain elevated for longer. Bangladesh's interest burden will remain elevated in the absence of more effective fiscal revenue reforms.”

It notes that Bangladesh relies entirely on official bilateral and multilateral partners for its foreign currency borrowing, which partially mitigates risks to its debt profile. It further mentions a new IMF programme requested by the government would likely include fiscal and banking sector reforms, and could help to further bolster forex reserves with continued funding.

“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.”

Foreign exchange reserves rose by about $6.2 billion in fiscal 2026 to $32.9 billion, marking a notable recovery from previous lows below $20 billion. This covers about 4.5 months of current account payments, compared with only about 3.3 months at the end of fiscal 2024, and about 4.1 months at the end of fiscal 2025.

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.

The agency notes Bangladesh and the IMF began talks on a new programme in July 2026. The central bank has kept its policy rate at 10% amid persistently high inflation, which could rise further due to higher oil prices.

The agency estimates the current account posted a deficit of about 0.1% of GDP in fiscal 2026, while remittances rose 19% in the first 11 months despite a 2% decline in exports. It expects the current account deficit to widen to 1.7%-2.2% of GDP over the next three years as imports recover, with higher energy prices adding pressure.

It forecasts 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%.

Bangladesh's banking sector remains vulnerable despite stable industry risk, the agency reiterates. State-owned banks, holding less than 30% of banking assets, have nonperforming 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.