Fitch rates BD outlook as 'Negative' over Middle East crisis

Fitch Ratings has revised the outlook on Bangladesh's Long-Term Issuer Default Ratings (IDRs) to 'Negative' from 'Stable', while affirming the ratings at 'B+'.
The outlook revision reflects Bangladesh's increased external finances and macroeconomic vulnerabilities stemming from significant exposure to the conflict in the Middle East (ME).
Fitch, one of the three major global rating agencies, released its latest assessment for Bangladesh on Wednesday through its Hong Kong office.
Moreover, Fitch considers that limited progress in reforms to address weaknesses in Bangladesh's policy framework, public finances and financial sector, as well as sustained weak institutional governance, is gradually eroding the sovereign's capacity to absorb shocks.
The ratings reflect moderate government debt and access to concessional external financing, which is balanced against an external liquidity position that is still relatively weak, governance standards lower than peers, significant financial sector challenges, and lagging structural metrics compared with its peers.
The Middle East conflict creates significant downside risks, particularly through the supply and cost of energy imports and remittances. Nearly half of remittances (3.5 per cent of the Gross Domestic Product in 2025) are from the Middle East, and crude oil and petroleum products together comprise nearly 15 per cent ($10 billion in 2025) of total imports.
Strong remittances so far in the financial year 2026 (FY26, June/2026) provide near-term support to external finances.
However, uncertainty regarding the conflict's duration poses substantial downside risks.
International reserves reached $29.5 billion in March 2026, around four months of the current external payments (CXP), below the 'B' median.
A crawling peg and continued access to external financing from official partners have helped ease pressures on reserves.
Wider current account deficits, stronger domestic FX demand or reduced availability of external financing, for instance, from uncertainty regarding continuation of the IMF programme, could lead to renewed pressures on the currency and reserves.
Fitch sees increased uncertainty regarding the new administration's willingness for reforms.
Certain key fiscal reforms to strengthen the banking sector's governance and independence of key public institutions are being reconsidered.
Constitutional reforms, supported by a referendum, are stalled, including term limits for the prime minister and strengthening the judiciary's independence.
Ranking on the World Bank's composite governance score is in the 18th percentile, versus 33 for the 'B' median.
Low general government revenue-to-GDP remains a long-standing fiscal weakness, and fell further to 7.9 per cent of the GDP in FY25 from 8.3 per cent in FY24.
Revenue collections continue to be hampered by large tax exemptions, inefficient tax administration, and a weak tax compliance culture.
"Budget underperformance owing to a revenue shortfall is an underlying driver of wider fiscal deficits, which we forecast to reach 3.6 per cent of GDP by 2027," Fitch said.
Inflationary pressures are high, due partly to a shortage of essential commodities.
Headline CPI for March 2026 fell to 8.71 per cent from 9.13 per cent in February, although this is well above the central bank's FY26 target of 6.5-7.0 per cent.
"The authorities have announced an increase in fuel prices, including kerosene, diesel, octane, petrol, and liquefied petroleum gas (LPG) from April 19, 2026, which will add to price pressures," said Fitch.
"We expect the FY27 CPI to be at the same level as FY26 of 9.0 per cent due to the possible build-up of inflationary pressures. We expect the economy to expand by 3.7 per cent in FY26 and 3.5 per cent in FY27," it added.
A prolonged period of high energy prices and increased global uncertainty would have a negative impact on the growth forecasts.
Ready-made garment exports have been falling due to some redirection of orders after the reciprocal tariffs, weaker global demand, and higher domestic costs. Banking sector credit metrics remain weak, especially those of public-sector banks.
Banks' gross non-performing loan (NPL) ratio had reached 30.6 per cent as of end-December 2025, with most NPLs at state-owned banks.
NPLs could rise further once forbearance measures are withdrawn.
This remains a source of contingent liability if credit stress intensifies.
Domestic credit to the private sector had declined to 6 per cent in January 2026, from nearly 10 per cent two years ago, weighing down investment activity.
"We expect gross government debt to stabilise at about 38 per cent of GDP over the medium term, well below the 'B' median. Potential contingent liabilities from the banking sector, debt of state-owned enterprises, and higher borrowing costs are risks to the debt trajectory," said Fitch.
The interest-revenue ratio has been rising gradually and has reached about 29 per cent - more than double the 'B' median's 14 per cent as of end-2025, adding to fiscal pressures.
External debt is owed either to bilateral or multilateral partners, and Fitch expects financing from these sources to continue, supporting the ongoing debt-service capacity.
Bangladesh has an ESG Relevance Score of '5' for both political stability and rights, as well as the rule of law, institutional and regulatory quality and control of corruption.
"These scores reflect the high weight that the World Bank Governance Indicators (WBGIs) have in our proprietary Sovereign Rating Model," Fitch said.
Bangladesh has a low WBGI ranking in the 18th percentile, reflecting weak rights for participation in the political process and institutional capacity, uneven application of the rule of law, and a high level of corruption.
Jasimharoon@yahoo.com