S&P reduces Bangladesh’s outlook

S&P Global Ratings has downgraded Bangladesh’s long-term rating outlook from stable to negative, expressing concerns over potential risks to the country’s external liquidity position in the coming year. The ratings agency highlighted that Bangladesh’s foreign exchange reserves are facing pressure, and there is a risk of further deterioration.

On Tuesday, S&P projected the economy’s annual expansion to be in the range of 6 percent to 6.4 percent between 2024 and 2026.

The nation in South Asia is grappling with challenges in paying for imported fuel due to a dollar shortage. As a result, its dollar reserves have declined significantly, shrinking by over a third since Russia’s invasion of Ukraine, standing at $29.85 billion as of July 19.

While S&P reaffirmed its BB- long-term and B short-term sovereign credit ratings on Bangladesh, it warned that these ratings could be downgraded if external debt or liquidity metrics worsen further.

The ratings agency pointed out that a lower generation of current account receipts than expected, a larger overall current account deficit than forecasted, or failure to significantly boost foreign exchange reserves would signal downward pressure on the rating.

Bangladesh is now reliant on favourable trade and financial flows to stabilise its external settings in the next 12 months, according to S&P.

The nation, with a population of nearly 170 million people, has already sought a $4.7 billion loan from the International Monetary Fund this year to cope with the rising costs of imported fuel and food.

The negative ratings outlook reflects the deteriorating economic conditions in Bangladesh, which could potentially hinder foreign investment and further erode the confidence of international lenders, according to Khondaker Golam Moazzem, research director at the think tank Centre for Policy Dialogue.

Moazzem stressed the need for specific measures, especially in subsidy management and energy imports, as these are the main weaknesses in the foreign exchange reserve situation. He suggested that the government should take bold actions, including exploring alternatives like gas for energy needs and adopting solar-based and other renewable energy measures to reduce energy import dependency.