Fitch cuts Bangladesh deeper into junk on weak external buffers

FITCH Ratings downgraded Bangladesh’s sovereign rating on Monday (May 27), citing sustained weakening of the country’s external buffers, which risks making the South Asian nation more vulnerable to shocks.

Fitch cut the country’s credit score to B+ from BB-, sending it deeper into non-investment grade, or junk, territory, with a stable outlook. That is in line with Turkey, Tanzania and Rwanda.

“Policy actions since early 2022 have been insufficient to stem the fall in foreign exchange reserves and resolve domestic US dollar tightness,” analysts including Sagarika Chandra, the director and primary rating analyst at Fitch, said in a statement.

Uncertainty remains around implementation of the new crawling peg regime, and to what extent the official rate will be permitted to align with the parallel market rate, they added.

Earlier this month, Bangladesh’s central bank introduced a crawling peg to keep the taka stable and slow the erosion of its foreign exchange reserves. Even so, the country’s foreign exchange stockpile has fallen by 15 per cent from January to US$18.4 billion, according to Fitch.

Increased external vulnerability due to a decline in forex reserves and higher fiscal deficits could lead to a further negative action, Fitch said. Budget underperformance owing to a revenue shortfall, high borrowing costs and weak banking sector health remain as key risks to fiscal position, it added.

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Since becoming an independent country in 1971, Bangladesh has made use of a series of fixed exchange rates to manage volatility and keep imports affordable.

The nation is looking to allow the currency to float freely for the first time in the country’s history, a key demand from the International Monetary Fund to keep its loan programme on track.

The Bangladesh taka fell about 6 per cent last year, one of the worst performers in emerging Asia, according to data compiled by Bloomberg.

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The IMF and the country’s authorities recently reached a staff-level agreement on the policies needed to unlock US$1.1 billion in funds. These reforms may improve macroeconomic stability and address banking sector weaknesses, Fitch said. BLOOMBERG