Bangladesh's debt-to-GDP ratio to climb to 35.6% this year: Fitch

Bangladesh's debt-to-GDP ratio is expected to reach 35.6% this year, up from 33.2% in 2022, according to the American credit rating agency Fitch Ratings.

Besides, the ratio will continue increasing to 36.4% next year and 37.2% in the following, which, however, would still be the lowest in the Asia Pacific emerging markets, Fitch revealed in an article published on Friday.  

The debt-to-GDP ratio compares a country's public debt to its gross domestic product (GDP).

By comparing what a country owes with what it produces, the debt-to-GDP ratio indicates that particular country's ability to pay back its debts.

The higher the debt-to-GDP ratio, the less likely the country will pay back its debt and the higher its risk of default.

Fitch's latest forecast is close to the estimates published by the Bangladesh finance ministry in its medium-term macroeconomic policy statement for FY24 to FY26.

The policy statement estimates Bangladesh's total debt to GDP at 36.6% for FY24 and projects it at 37.6% in FY25.

Despite the increase, Fitch's forecasts reveal that Bangladesh will see a relatively low debt-to-GDP ratio, compared to other countries in the Asia-Pacific region.

For instance, it forecasted India's debt-to-GDP ratio at 83.5%, and China's debt-to-GDP ratio at 54.3% for 2023.

Overall, Fitch Ratings expects general government debt/GDP to fall for around half of sovereigns in Asia over 2023-25.

However, it states that the scale of the decline appears modest in the context of strong regional economic growth and the large increase in government debt in most economies during the Covid-19 pandemic.

"Some of Asia's fast-growing emerging markets – including China (A+/Stable), India (BBB-/Stable) and Bangladesh (BB-/Negative) – are among those where we expect debt/GDP will continue to rise in 2023-2025, building on increases which were already big during the pandemic," the US credit rating agency said.

"Government debt rises from a relatively low base in China and Bangladesh, though this does not include China's local government financial vehicle debt.

"Meanwhile, India's debt and interest burdens are already high relative to 'BBB' category peers, which constrains India's rating."

According to Fitch, APAC sovereigns, including Bangladesh, Sri Lanka, Pakistan, Taiwan, China, Korea, India, and Singapore, face headwinds in the near term from continued weak external demand, the credit rating agency warned.

"Nevertheless, we project the median level of economic growth among our rated APAC developed-market sovereigns over 2023-25 will average around 2.2%, compared with 1.4% for North American and Western European sovereigns. APAC emerging-market sovereigns will average 5.3% growth in the same period," it said.

What it means

A country with a high debt-to-GDP ratio typically has trouble paying off external debts (also called public debts), which are any balances owed to outside lenders. In such scenarios, creditors are apt to seek higher interest rates when lending.

Generally, a lower debt-to-GDP ratio is ideal, as it signals a country is producing more than it owes, placing it on a strong financial footing.