S&P revises Bangladesh outlook to negative on rising economic risks

S&P Global has revised its long-term outlook on Bangladesh to negative from stable amid persistent weakness in the banking sector, with additional risks stemming from volatile global energy markets and trade conditions.

"We revised the outlook to negative due to the increasing risks to Bangladesh's economy posed by a weak domestic banking sector, fiscal constraints, external headwinds, and the growing prospect of a more protracted recovery," S&P said in its outlook report on July 27.

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"Our ratings on Bangladesh reflect the economy's modest per capita income and limited fiscal flexibility owing to a combination of low revenue-generation capacity and the government's elevated interest burden. Evolving administrative and institutional settings represent additional rating constraints."

The US-based ratings agency said continued stability in Bangladesh's external accounts will depend on remittances remaining strong, a rebound in the readymade garment sector, and continued engagement with multilateral lenders.

In May this year, global ratings agency Fitch Ratings revised its outlook on Bangladesh's long-term rating to negative from stable, citing macroeconomic vulnerabilities arising from the country's significant exposure to the conflict in the Middle East.

S&P said the negative outlook on Bangladesh reflects its view that the country's trend of economic growth and external balance sheet position could weaken further because of adverse conditions.

"These include the war in the Middle East, financial sector imbalances, and energy market vulnerabilities, which could impede a faster export and economic recovery over the next 12 to 18 months," the agency said.

S&P also cautioned that it could lower Bangladesh's ratings if the country's long-term trend growth rate declines to levels more in line with those of peers with similar average incomes, reflecting its expectation that economic growth is unlikely to rebound significantly from current levels over the next two to three years.

It could also lower the ratings if Bangladesh's external position deteriorates, such that, for example, narrow net external debt exceeds 100 percent of current account receipts on a sustained basis, the agency said.

The report said lower current account receipts, a wider current account deficit, or a failure to materially increase foreign exchange reserves could also put downward pressure on the ratings.

S&P said Bangladesh's economy has decelerated significantly over the past three years, and numerous challenges to its recovery remain.

It projected annual economic growth to average around 4.5 percent over the next three years amid weakness in the domestic banking sector, uncertainty in energy markets, and an uncertain outlook for the readymade garment sector.

The report said the national election in February 2026 gave a strong mandate to 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."

The report said Bangladesh's economy continues to face challenges that could slow its recovery.

This follows the political crisis in 2024 and coincides with lingering weakness in the banking sector, which is undergoing sweeping consolidation to address poor asset quality at some of the country's banks.

"Inflation also remains elevated amid disruptions in the energy market. This could put the brakes on a stronger recovery in private consumption, as incomes are squeezed by elevated fuel and electricity prices."

Bangladesh's garment industry remains highly competitive, with low unit labour costs and an ample supply of labour. However, mixed external demand conditions continued to weigh on readymade garment exports in fiscal year 2025-26, which ended on June 30.

The US tariff policy applicable to Bangladesh remains in flux. On July 24, 2026, the United States introduced new tariffs on a number of economies, including Bangladesh, which is subject to a 10 percent tariff on most goods exported to the US.

In its assessment, S&P said Bangladesh continues to face significant challenges, including evolving institutional settings, infrastructure deficiencies, and bureaucratic inefficiencies. Reforms to effectively address these vulnerabilities will take time.

The report said continued improvement in the external sector will depend on energy market developments and support from multilateral lenders, while banking sector and fiscal reforms will be crucial for broader macroeconomic stability.

"We expect the gradual accumulation of foreign exchange reserves to continue even as Bangladesh's current account transitions to a moderate deficit position. Downside risks could emerge if energy prices remain elevated for longer."