S&P revises Bangladesh outlook to negative on banking sector, fiscal risks

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

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

"We 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," it said in its report published yesterday (27 July).

S&P said the revision reflected the risk that economic growth and the country's external position could weaken further amid persistent financial sector imbalances, volatile energy markets and uncertain global trade conditions.

The rating agency identified the banking sector as a key source of risk, pointing to poor asset quality and high levels of non-performing loans, particularly among state-owned banks where non-performing loan ratios are about 40%. It said these weaknesses are likely to limit the banking sector's ability to support an economic recovery.

Bangladesh also faces fiscal challenges stemming from a narrow revenue base and rising debt-servicing costs. Government revenue remains equivalent to about 8%-9% of gross domestic product, while interest payments account for roughly 30% of government revenue. Public debt is expected to continue rising gradually, reaching about 43% of GDP by fiscal 2029.

Economic growth has slowed over the past three years, with S&P projecting real GDP growth to average 4.5% over the next three years. Per capita GDP growth has fallen to 3.3%, compared with a 10-year average of 5.8% recorded in 2022.

Despite the weaker outlook, Bangladesh's foreign exchange reserves have recovered, reaching $32.9 billion in fiscal 2026. The improvement has been supported by strong remittance inflows, which rose 19% during the first 11 months of fiscal 2026.

The country's export outlook, however, faces challenges. The readymade garment sector, which accounts for more than 85% of merchandise exports, is under pressure from mixed global demand and a new 10% US tariff introduced in July 2026.

S&P expects Bangladesh's current account balance to move from near balance to a deficit of between 1.7% and 2.2% of GDP over the next three years as import demand recovers.

The rating agency said the political environment could become more stable following the BNP's victory in the February 2026 general election. The new government has pledged to reduce inflation, attract more foreign direct investment and raise the country's tax-to-GDP ratio.

Bangladesh is also negotiating a new economic reform programme with the International Monetary Fund after the early termination of its previous arrangement. S&P said a new IMF-supported programme could provide an important anchor for reforms and continued support from multilateral lenders.

S&P said it could lower the sovereign ratings if economic growth fails to recover or if Bangladesh's external position deteriorates significantly, including if narrow net external debt exceeds 100% of current account receipts.

The outlook could be revised back to stable if the economy strengthens materially or if fiscal and external indicators improve, including through a sustained slowdown in the accumulation of government debt, said the rating agency.