Banking fragility, fiscal strain downgrade Bangladesh to B2

Lowered GDP growth forecast for 2025 to 4.5pc
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Staff Reporter :

Moody’s Ratings downgraded Bangladesh’s sovereign rating to B2 from B1 on Monday, citing increased political risks and weaker growth prospects.

This downgrade places Bangladesh further into speculative-grade territory, aligning its rating with nations such as Rwanda, Cambodia, and Mongolia. The outlook was also revised from stable to negative.

The downgrade reflects rising political uncertainty and a slowing growth trajectory, which have heightened government liquidity risks, external vulnerabilities, and banking sector fragilities following recent political and social unrest that led to a change in government, Moody’s stated.

The agency highlighted Bangladesh’s increasing reliance on short-term domestic debt to finance its fiscal deficit, which exacerbates liquidity risks.

It also noted that the country’s banking system faces amplified asset-quality risks, further straining already weak capital and liquidity positions.

Despite some improvement in remittance inflows and loan disbursements from development partners, external vulnerabilities remain elevated due to a persistent decline in foreign exchange reserves.

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The negative outlook reflects potential downside risks to Bangladesh’s growth trajectory, which could worsen fiscal pressures and amplify external vulnerabilities.

These risks stem from weakening domestic demand, supply-chain disruptions due to political unrest, and a clouded export outlook, particularly for the ready-made garments sector.

Moody’s lowered its GDP growth forecast for the fiscal year ending June 2025 to 4.5% from an earlier estimate of 6.3%.

It cited lapses in law and order, which have dampened domestic demand and adversely affected the garment sector, as key factors.

Fitch Ratings also downgraded Bangladesh’s sovereign rating in May, highlighting the urgency of bolstering foreign exchange reserves despite securing a $4.7 billion bailout from the International Monetary Fund last year.

The Bangladeshi taka has been among Asia’s worst-performing currencies in 2024, depreciating by more than 8% against the US dollar.

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