S&P flags banking risks in BD
S&P Global Ratings has revised Bangladesh’s sovereign credit outlook from stable to negative, citing mounting risks from weaknesses in the banking sector, external vulnerabilities and uncertainties in global energy and trade markets, while affirming the country’s ‘B+’ long-term and ‘B’ short-term sovereign credit ratings.
In its latest assessment, released on 27 July, the international ratings agency said Bangladesh faces a challenging period of economic rebalancing, with the pace of recovery likely to depend on sustained remittance inflows, a rebound in the readymade garment (RMG) sector and continued engagement with multilateral development partners.
Explaining the revision, S&P said, “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.”
The agency said Bangladesh’s long-term rating could come under further pressure if economic growth slows to levels comparable with countries of similar income or if the country’s external position deteriorates significantly, including a sustained rise in narrow net external debt beyond 100 per cent of current account receipts.
Other downside risks include weaker-than-expected current account earnings, a larger current account deficit and an inability to substantially strengthen foreign exchange reserves.
Conversely, S&P said the outlook could return to stable if Bangladesh records stronger economic growth over the next three to four years, signalling a more durable recovery.
“We could also revise the outlook to stable if there is a significant strengthening of Bangladesh’s external and fiscal performance,” the agency said, noting that stronger current account receipts, higher foreign exchange reserves and lower external financing needs would support an improved assessment.
The ratings agency added that sustained fiscal improvement, reflected in slower government debt accumulation and a declining debt trajectory, would also strengthen Bangladesh’s credit profile.
Banking sector remains key concern
S&P attributed the outlook revision largely to growing risks stemming from Bangladesh’s fragile banking sector, limited fiscal flexibility and external headwinds, warning that these factors could prolong the country’s economic 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,” the report said.
The agency also cited evolving institutional and administrative settings as additional constraints on the sovereign rating.
However, it said Bangladesh continues to benefit from a historically strong long-term growth record, a moderate public debt burden and continued financial support from bilateral and multilateral development partners.
According to S&P, stronger engagement with development partners, steady remittance inflows and sustained export earnings from Bangladesh’s globally competitive garment industry will remain essential to maintaining external stability.
Recovery faces multiple challenges
The report noted that Bangladesh’s economic recovery has been constrained by persistent weaknesses in the banking sector and uncertainties in global energy markets.
S&P estimates annual economic growth will average around 4.5 per cent over the next three years as banking sector vulnerabilities, energy market volatility and uncertain demand for readymade garments continue to weigh on economic activity.
The agency observed that Bangladesh’s February 2026 general election, which delivered a strong mandate for the BNP-led government, could contribute to more stable policymaking.
“This could support more stable policymaking conditions going forward, which will be a key determinant of the government’s ability to adopt effective reforms,” it said.
Nevertheless, the agency cautioned that the economy continues to face significant structural challenges following the political crisis of 2024, while banking sector consolidation remains necessary to address poor asset quality in several financial institutions.
It also warned that elevated inflation, driven partly by energy market disruptions, continues to constrain household purchasing power and private consumption.
External sector and trade outlook
S&P estimated Bangladesh’s per capita income at around US$2,750 in the fiscal year ended June 2026, while noting that the country’s ten-year weighted average real per capita GDP growth has slowed to approximately 3.3 per cent, down from 5.8 per cent recorded in 2022.
Although Bangladesh’s garment industry remains internationally competitive due to low labour costs and a large workforce, the agency said external demand weakened during FY2025-26, with readymade garment exports declining 2.6 per cent year-on-year during the first eleven months of the fiscal year.
The report also highlighted the government’s efforts to improve market access ahead of Bangladesh’s graduation from Least Developed Country (LDC) status later this year, although it cautioned that reforms to improve competitiveness and the business environment would take time.
Regarding trade, S&P noted that the United States introduced a 10 per cent tariff on most Bangladeshi exports on 24 July 2026, adding further uncertainty for a country where more than 85 per cent of merchandise exports are readymade garments.
Between January and March 2026, around 18 per cent of Bangladesh’s exports were destined for the United States, of which approximately 86 per cent comprised readymade garments, excluding leather and other textile products.
Reform agenda and external resilience
The ratings agency said the new government has pledged to increase foreign direct investment, raise the tax-to-GDP ratio to 10 per cent over the medium term, control inflation and expand infrastructure investment.
S&P believes a more stable political environment could encourage greater foreign investment and facilitate long-term structural reforms, although institutional weaknesses, infrastructure deficiencies and bureaucratic inefficiencies remain significant challenges.
The agency expects Bangladesh’s foreign exchange reserves to continue recovering despite a moderate current account deficit, although prolonged high energy prices remain a key downside risk.
Bangladesh relies primarily on bilateral and multilateral development partners for external borrowing, a factor S&P said helps moderate sovereign debt risks.
The report also noted that Bangladesh and the International Monetary Fund (IMF) began discussions on a new programme in July 2026, which could support fiscal reforms, banking sector restructuring and further strengthen foreign exchange reserves.
Foreign exchange reserves increased by approximately US$6.2 billion during FY2025-26 to US$32.9 billion, covering around 4.5 months of current account payments, compared with 3.3 months at the end of FY2023-24.
S&P estimated Bangladesh’s current account deficit at 0.1 per cent of GDP in FY2025-26, while remittance inflows rose 19 per cent during the first eleven months of the fiscal year despite a 2 per cent decline in exports.
Looking ahead, the agency expects the current account deficit to widen to between 1.7 and 2.2 per cent of GDP over the next three years as imports recover and higher energy prices increase external financing requirements.
It also projects the fiscal deficit to reach around 4.7 per cent of GDP, with net government debt rising to approximately 43 per cent of GDP by FY2029.
Revenue mobilisation is expected to remain relatively weak at 8-9 per cent of GDP, although ongoing tax reforms could lift collections modestly above 9 per cent.
Reiterating its concerns over the financial sector, S&P said Bangladesh’s banking system remains vulnerable.
State-owned banks, which account for less than 30 per cent of banking sector assets, have non-performing loans of around 40 per cent, while limited central bank independence, underdeveloped capital markets and persistently high inflation continue to constrain the effectiveness of monetary policy.
