United States-based credit rating agency Fitch Ratings has downgraded Bangladesh's Long-Term Foreign-Currency Issuer Default Rating to 'B+' from ‹BB-›, due to the lingering weakening of the country's external buffers.
In its report published on Monday, Fitch, however, found the financial outlook ‘stable’.
Fitch said that policy measures, taken since early 2022, had not sufficiently halted the decline in reserves or resolved domestic dollar shortages.Â
The recent adoption of a crawling peg exchange rate system aims to increase flexibility, but its effectiveness in addressing forex market distortions and rebuilding reserves remains uncertain, it said.
The stable outlook reflects the mitigation of external refinancing risks by a favourable external creditor composition, the International Monetary Fund programme reforms to improve macroeconomic stability, moderate government debt, and favourable medium-term growth prospects, it said.
Bangladesh›s foreign exchange reserves have dropped significantly due to continued interventions, capital outflows, and the persistent use of informal channels for remittances.
Reserves have decreased by 15 per cent from January 2024, reaching $18.4 billion, according to the report.
Fitch projected that the reserves would stabilise due to recent reforms, despite uncertainty around the new foreign currency regime.
Bangladesh Bank considers the crawling peg an interim step before moving to a fully flexible market-based exchange rate.
High inflation, at 9.8 per cent in April 2024, may complicate efforts to increase exchange rate flexibility.
Persistent high inflation is expected due to domestic supply shortages, import restrictions, and a weaker exchange rate, averaging 9.7 per cent in FY24, well above the central bank›s 7.5 per cent target, it read.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, told ¶¶Òõ¾«Æ· that the downgrade in the credit rating did not bear a good message for the country.
Mansur, however, noted that the rating downgrade was unlikely to have a significant further impact on the economy, as foreign direct investment inflows have already declined.
He hoped that the recent policy decisions by Bangladesh Bank if properly implemented, would help stabilise the dollar market. He suggested the government intensify efforts to boost revenue collection and reduce the budget deficit for overall economic stabilisation.
Revenues continue to underperform owing to prevailing tax exemptions, weak tax administration, and challenges in implementing tax reforms, the report said.
‘In the near term, however, we expect growth to moderate to 5.3 per cent in FY24 due to the US dollar shortage that is likely to weigh on investment and high inflation reducing consumption,’ it noted.
‘We expect gross government debt to increase gradually to about 40 per cent of GDP over the medium term, from about 36 per cent in FY23, but still well below the current ‹B› median of 55 per cent,’ it said.
Banking sector weaknesses include poor asset quality, capitalization, and governance, particularly in public-sector banks.
Non-performing loan ratios were 9 per cent at the end of 2023, with state-owned banks at 21 per cent. These could rise with the withdrawal of forbearance measures, posing potential sovereign contingent liabilities, according to the report.
Last year, three prominent international credit rating agencies—Moody’s Investors Service, S&P Global, and Fitch—downgraded the nation’s economic outlook.
On September 27, 2023, Fitch Ratings expressed concerns about Bangladesh’s capacity to meet its foreign-currency debt obligations, shifting its outlook from ‘stable’ to ‘negative.’