S&P downgrades rating for Bangladesh amid violent protests

S&P Global has lowered its long-term foreign and local currency sovereign credit ratings for Bangladesh citing elevated external vulnerabilities.

The rating was previously BB- which was lowered to B+ today (30 July).

The outlook on the long-term ratings is stable. At the same time, they affirmed their 'B' short-term ratings.

The 'B+' ratings on Bangladesh reflect the country's modest per capita income and limited fiscal flexibility owing to a combination of low revenue-generation capacity and high interest burden.

Evolving administrative and institutional settings represent additional rating constraints, said S&P.

The agency said, Bangladesh's external liquidity is weakening, as indicated by sustained depletion of its official foreign exchange reserves.

A report published on their website said, "Macroeconomic policies enacted in May 2024--such as transitioning to a crawling-peg exchange rate regime, allowing the taka to depreciate, and tightening monetary policy--could help to rebuild external buffers, although the progress will likely be gradual. Meanwhile, a high-interest expense ratio and a narrowing but still relatively large budget deficit will continue to weigh on our fiscal assessment."

The downgrade reflects persistent pressure on Bangladesh's external metrics, marked in particular by a continued decline in foreign exchange reserves, said S&P.

"This has occurred despite import compression measures enacted by Bangladesh Bank (the central bank) and a smaller current account deficit. Gross external financing needs, by our measures, now exceed the sum of current account receipts and usable reserves," they added.

Bangladesh's external profile remains under pressure. Falling foreign exchange reserves through May 2024 reflect continued net balance of payments outflows, and suggest elevated demand for dollars relative to the taka. The latest data show that gross reserves, measured on a BPM6 basis, stood at $21.8 billion as of end June 2024. This is 35% lower than the figure in June 2022, and enough to cover only about 3.3 months of current account payments.

"We weigh these factors against consistently strong economic growth, a moderate public debt burden, and an external position that is supported by broad engagement with bilateral and multilateral development partners, large remittances from overseas Bangladeshi workers, and a globally competitive garment manufacturing sector," reads the report.

The agency in their report said, Bangladesh is also currently grappling with widespread student-led protests that have reportedly led to more than 200 deaths, according to local news sources. The protests arose after a lower court reinstated a system of quotas for civil service jobs. In response to the protests, the government imposed a telecommunications blackout and nationwide curfew. On 21 July, the supreme court scaled back most of the quotas.

"We could raise our ratings on Bangladesh if it materially improves its external metrics. That improvement would likely be indicated by current account receipts or foreign exchange reserves rising substantially beyond our forecasts, such that gross external financing needs remain lower than 100% of current account receipts plus usable reserves on a sustained basis," the report reads.

In May, Fitch downgraded Bangladesh to 'B+' from 'BB-' due to a sustained weakening of external buffers that could likely prove challenging to reverse, despite recent policy reforms.
Bangladesh has sought credit assistance from a number of countries to address its dollar shortage and declining foreign exchange reserves, with China one of the nations approached, Finance Ministry officials had said earlier this month.