Fitch Ratings downgrades Bangladesh to B+; outlook stable

The downgrade reflects sustained weakening of Bangladesh's external buffers, which could prove challenging to sufficiently reverse despite recent policy reforms, leaving the country more vulnerable to external shocks, Fitch Ratings said in a release.

Policy actions since early 2022 have been insufficient to stem the fall in foreign exchange (forex) reserves and resolve domestic dollar tightness. The recent shift to a crawling peg aims to increase exchange-rate flexibility. Whether this will fully address lingering forex market distortions and support significant reserves build-up remains unclear, the Hong Kong-based entity noted.

The stable outlook reflects mitigation of external refinancing risks by a favourable external creditor composition, International Monetary Fund-programme reforms to improve macroeconomic stability and address banking sector weaknesses, moderate government debt and favourable medium-term growth prospects.

Domestic US dollar scarcity has resulted in effective import restrictions, as authorities manage allocation of forex. Lower imports from such measures and sustained export growth drove the current account surplus to a Fitch-estimated 1.4 per cent of gross domestic product (GDP) in fiscal 2023-24 (FY24) ended 30 June.

Greater forex flexibility should ease US dollar shortages, which could drive up imports in the next few years, the rating agency observed.

It expects high inflation to persist due to domestic supply shortages, import restrictions and a weaker exchange rate. Inflation in FY24 averaged 9.7 per cent, far above the central bank's target of 7.5 per cent, despite a 200 basis points hike in the policy rate.

The long-term foreign currency IDR also reflects low government revenues, favourable debt composition, favourable growth prospects, a weak banking sector and weak structural metrics, Fitch added.

ALCHEMPro News Desk (DS)