The US credit rating agency S&P Global has revised the outlook on Bangladesh’s long-term sovereign credit rating from ‘stable’ to ‘negative’, signalling a potential further downgrade within 12 to 24 months if economic conditions fail to improve. The rating agency maintained the country’s long-term sovereign rating at ‘B+’ and short-term rating at ‘B’.

The revision marks the latest in a series of downgrades and negative outlooks issued by international rating agencies in recent years. S&P previously lowered Bangladesh’s rating from ‘BB-’ to ‘B+’ in July 2024, a year after first placing the outlook on ‘negative’.

In its assessment, S&P cited enduring banking sector weakness, volatile global energy markets and trade uncertainties as key headwinds to economic rebalancing. Continued stability in Bangladesh’s external accounts, the agency noted, will depend on remittances remaining strong, a rebound in the readymade garment sector and engagement with multilateral lenders.

Fellow “Big Three” agencies Moody’s Investors Service and Fitch Ratings have similarly downgraded Bangladesh repeatedly since 2023. Fitch placed Bangladesh’s long-term foreign-currency rating on a ‘negative’ outlook in mid-May, underscoring broader erosion in the economic resilience, investment appeal and trade credibility of South Asia’s second-largest economy.

Md Zonayed Abdur Rahim Saki, the state minister for planning, attributed the negative outlook to structural flaws inherited from the previous administration.

“The challenges and crises on which S&P has based Bangladesh’s sovereign rating and outlook are a legacy of the fascist era,” the state minister told Bonik Barta. “We are trying to revive the economy. Several indicators have already improved, and reform initiatives covering the banking sector and other challenges S&P highlighted are underway.”

Bangladesh’s economy decelerated meaningfully over the past three years, S&P noted, while projecting gross domestic product to expand by an average of 4.5 percent annually over the next three years.

The agency added: “Bangladesh’s legislative elections in February 2026 yielded a strong mandate for the Bangladesh Nationalist Party (BNP)-led government. This could support more stable policymaking conditions going forward, which will be a key determinant of the government's ability to adopt effective reforms.”

Mashrur Arefin, chairman of the Association of Bankers, Bangladesh and managing director of City Bank, described the rating action as a catalyst for overdue financial adjustments.

“The negative outlook is certainly worrying. But it can also be seen in a positive light. It’s the push we need to pursue more effective reforms to address economic and financial sector risks over the next 12 to 24 months,” Arefin told Bonik Barta.

While acknowledging that foreign lenders and investors would exercise greater caution, pushing up external borrowing and trade financing costs, Arefin added that sustained stabilisation in the banking and external sectors could open a clear path to an eventual outlook upgrade.

Political spillovers continue to weigh on economic performance, according to S&P, while banking sector distress remains unaddressed. Efforts by several lenders to restructure non-performing loans and weak balance sheets have yet to yield visible results. At the same time, elevated inflation driven by volatile fuel and power tariffs is squeezing real incomes and private consumption, threatening to stall domestic demand.

“Bangladesh’s economy faces continued challenges that could slow its ongoing recovery,” according to S&P. “This follows a political crisis in 2024, and coincides with lingering weakness in the banking sector, which is undergoing a sweeping consolidation to address poor asset quality at some of the country’s banks.”

The report added that inflation also remains elevated amid the energy market dislocation. This could put the brakes on a stronger recovery in private consumption growth, as incomes are stretched by elevated fuel and electricity prices.

Per capita income is projected to reach roughly $2,750 in the 2025–26 fiscal year, which ended in June 2026, acting as a structural constraint on the sovereign rating. This remains one of the main constraints on Bangladesh’s rating, S&P noted, adding that the country’s strong underlying growth has historically helped to mitigate this weakness.

While robust historical expansion once offset low income levels, average real per capita GDP growth over the past decade dropped to 3.3 percent from 5.8 percent in 2022. S&P warned that a continued decline in this metric would jeopardise Bangladesh’s outperformance on this metric compared with global peers, and further weaken credit support.

In the export sector, readymade garments retain a competitive edge rooted in low labour costs and an abundant workforce. Weak international demand nevertheless pulled garment exports down 2.6 percent in the first 11 months of FY 2025–26 compared with the same period a year earlier. Efforts to secure improved market access ahead of Bangladesh’s graduation from UN least-developed-country status remain underway, though broader structural reforms to business competitiveness will require time to yield results.

Compounding export headwinds is unresolved uncertainty surrounding the US tariff policy, which poses a direct risk to an economy where garments account for more than 85 percent of total merchandise exports.

On the policy front, S&P noted that post-election stability could improve continuity. The new government has set targets to attract foreign direct investment, elevate the tax-to-GDP ratio to 10 percent over the medium term, rein in inflation and expand infrastructure spending. The agency cautioned, however, that evolving institutional settings, infrastructure deficiencies and bureaucratic inefficiencies will demand prolonged and disciplined reform.

External buffers offer partial insulation. Inflows of foreign remittances surged nearly 19 percent in the first 11 months of FY 2025–26, helping lift gross foreign exchange reserves by $6.2 billion to $32.9 billion. Despite this accumulation, S&P expects the current account to return to a moderate deficit over the coming years as high energy import bills offset subdued garment revenues.

The S&P report also highlights severe downside risks. Prolonged elevation in global energy prices would intensify strain on the external balance, while slow fiscal reform risks keeping the government’s interest-servicing burden heavy.

Because Bangladesh relies almost entirely on official bilateral and multilateral partners for foreign-currency borrowing, its debt-profile risk remains relatively contained. A proposed new IMF programme, if tied to structural banking and fiscal overhauls, could further insulate foreign reserves. Although the external sector has held steady despite energy market turbulence driven by the Middle East conflict, S&P warned that any supply disruptions from the region could place the balance of payments under renewed pressure in the second half of 2026.

S&P forecasts Bangladesh’s current account deficit to widen to between 1.7 percent and 2.2 percent of GDP over the next three years, driven by persisting energy costs and an import recovery as political stability returns.

The combination of higher borrowed reserves and a growing current account deficit will contribute to a gradual worsening in Bangladesh’s external liquidity metric. S&P projects gross external financing needs to average roughly 102 percent of usable reserves and current account receipts combined over the next three years.

The government abandoned its previous EFF arrangement with the IMF earlier this year before opening negotiations on a replacement facility in July. The Fund considers accelerated revenue mobilisation, fiscal consolidation and a comprehensive banking sector cleanup imperative to halt further economic deceleration. S&P assesses that a new IMF program would anchor structural reforms and bolster assistance from multilateral lenders, whose support has played an important role in stabilising Bangladesh’s external metrics over the past three years.

Arif Hossain Khan, executive director and spokesperson for Bangladesh Bank, told Bonik Barta that S&P’s outlook reflected an evaluation of GDP growth and broader macroeconomic fundamentals.

“The concerns the agency expressed are also our concerns,” Khan said. “Bangladesh Bank has already undertaken a wide-ranging banking reform programme. Some measures are already in place. We’ve introduced rescheduling and exit policies to reduce non-performing loans — if the NPL ratio comes down, many of the sector’s problems will be resolved.”

Khan added that the government and central bank have launched initiatives to stimulate investment, including a BDT 600 billion incentive package. “Once the economy gains momentum and reforms are fully implemented, Bangladesh’s sovereign credit rating will improve in the eyes of S&P and the other rating agencies.”