Fitch revises Bangladesh outlook to negative, affirms 'B+' rating

Highlights

• Fitch Ratings revised Bangladesh's outlook to negative while affirming its 'B+' rating
• The agency cited rising external risks, slow reforms and weak governance
• Fitch warned the Middle East conflict could hurt remittances and energy imports
• Inflation is expected to remain high, while growth may slow further
• Bangladesh's banking sector remains weak, with rising bad loans

Fitch Ratings has revised Bangladesh's outlook to "negative" from "stable" while affirming the country's Long-Term Issuer Default Ratings (IDRs) at "B+", citing rising external vulnerabilities and slow progress in reforms.

In a statement issued from Hong Kong today (13 May), the global credit rating agency said the outlook revision reflects Bangladesh's growing macroeconomic and external financing risks stemming from significant exposure to the ongoing conflict in the Middle East.

Fitch said limited progress in implementing reforms aimed at strengthening the country's policy framework, public finances and financial sector has also contributed to the decision.

The agency further noted that sustained weak institutional governance is gradually reducing Bangladesh's ability to absorb economic shocks.

Despite the negative outlook, Fitch affirmed the sovereign rating at "B+", pointing to Bangladesh's moderate government debt levels and continued access to concessional external financing.

However, the agency said these strengths are offset by relatively weak external liquidity, lower governance standards compared with peer countries, persistent challenges in the financial sector and weaker structural indicators.

High vulnerability to conflict

Fitch said the ongoing conflict in the Middle East poses significant downside risks to Bangladesh, particularly through the supply and cost of energy imports and remittance inflows.

Nearly half of Bangladesh's remittances, equivalent to 3.5% of GDP in 2025, come from the Middle East, while crude oil and petroleum products together account for nearly 15% of total imports, or around $10 billion in 2025.

Strong remittance inflows in FY26 have so far provided short-term support to the country's external finances. However, the agency warned that uncertainty over the duration of the conflict poses substantial downside risks.

Fitch also cautioned that wider current account deficits, stronger domestic demand for foreign exchange or reduced availability of external financing, including uncertainty surrounding the continuation of the IMF programme, could renew pressure on the currency and foreign exchange reserves.

Uncertain reform outlook

Fitch said uncertainty has increased over the new administration's willingness to implement reforms.

According to the agency, several key fiscal reforms aimed at strengthening banking sector governance and ensuring the independence of key public institutions are being reconsidered.

It also noted that constitutional reforms backed by a referendum remain stalled, including proposals related to term limits for the prime minister and strengthening judicial independence.

A long-standing fiscal weakness

Low government revenue collection relative to GDP remains a long-standing fiscal weakness and declined further to 7.9% of GDP in FY25 from 8.3% in FY24.

Revenue collection continues to be constrained by large tax exemptions, inefficient tax administration and weak tax compliance.

Fitch said budget underperformance caused by revenue shortfalls is a key factor behind widening fiscal deficits, which it forecasts will reach 3.6% of GDP by 2027.

High inflation risks

Inflationary pressures remain elevated, partly due to shortages of essential commodities.

Headline inflation eased to 8.71% in March 2026 from 9.13% in February, but remained well above the central bank's FY26 target range of 6.5% to 7%.

The authorities also raised fuel prices, including kerosene, diesel, octane, petrol and liquefied petroleum gas (LPG), effective from 19 April 2026, which Fitch said would add further pressure on prices.

The agency expects inflation in FY27 to remain at 9%, unchanged from FY26, due to the potential build-up of additional inflationary pressures.

Downward pressure on growth

Fitch expects Bangladesh's economy to grow by 3.7% in FY26 and 3.5% in FY27.

It warned that a prolonged period of high energy prices and rising global uncertainty could further weaken growth prospects.

The agency also noted that ready-made garment exports have been declining due to the diversion of some export orders following reciprocal tariffs, weaker global demand and rising domestic production costs.

Weak banking sector

Fitch said banking sector credit metrics remain weak, particularly among state-owned banks.

The gross non-performing loan (NPL) ratio in the banking sector rose to 30.6% by the end of December 2025, with the majority of bad loans concentrated in state-owned banks.

The agency warned that NPLs could rise further once temporary regulatory forbearance measures are withdrawn, posing contingent liability risks if financial stress intensifies.

Private sector credit growth also fell to 6% in January 2026 from nearly 10% two years earlier, weighing on investment activity.

Moderate government debt

Fitch expects Bangladesh's gross government debt to stabilise at around 38% of GDP over the medium term, which remains well below the median for countries rated 'B'.

However, the agency warned that contingent liabilities from the banking sector, debt owed by state-owned enterprises and rising borrowing costs could pose risks to the debt outlook.

It also noted that the interest-to-revenue ratio has been rising gradually and reached around 29% by the end of 2025, more than double the 'B' median of 14%, increasing fiscal pressure.

According to Fitch, Bangladesh's external debt is mainly owed to bilateral and multilateral lenders, and continued financing from these sources is expected to support the country's debt-servicing capacity.