The downgrade reflects sustained weakening of Bangladesh's external buffers, the American credit rating agency says
Published : 27 May 2024, 10:00 PM
Fitch Ratings has downgraded Bangladesh's Long-Term Foreign-Currency Issuer Default Rating to 'B+' from 'BB-'.
Although the outlook for the country is stable, the downgrade reflects sustained weakening of Bangladesh's external buffers, the leading American credit rating agency said in a commentary on Monday.
The weakening external buffers could prove challenging to sufficiently reverse despite recent policy reforms and also leave the country more vulnerable to external shocks, according to Fitch.
It said policy actions since early 2022 have been insufficient to stem the fall in foreign exchange 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 FX market distortions and support significant reserves build-up remains unclear,” Fitch said.
It blamed continued interventions, capital outflows and persistent use of informal channels for remittances for substantial dwindling of dollar reserves.
Reserves have fallen by 15 percent from January 2024 levels to $18.4 billion and Fitch projects reserves to stabilise on recent reforms.
It said uncertainty remains around implementation of the new foreign currency regime, and to what extent the official rate will be permitted to align with the parallel market rate.
Bangladesh Bank says the crawling peg is an interim arrangement before moving to a fully flexible market-based exchange rate.
Further moves to increase exchange rate flexibility may be complicated by persistent high inflation, which was 9.8 percent in April 2024, the agency said.
It added that the Stable Outlook reflects mitigation of external refinancing risks by a favourable external creditor composition, IMF-programme reforms to improve macroeconomic stability and address banking sector weaknesses, moderate government debt and favourable medium-term growth prospects.