Fitch Ratings trims growth forecast citing policy uncertainty

Fitch Ratings has cut its economic growth forecast on Bangladesh to 4.5 percent for the current fiscal year as the country's recent political transition created policy uncertainty in the near-term.

The American credit rating agency previously projected that the economy of Bangladesh, which is the second biggest in South Asia after India, would witness growth of 5.3 percent in FY25.

"But we expect a recovery [of the economic growth rate] to 5.7 percent in FY26," Fitch Ratings said in a commentary on Bangladesh released yesterday.

Similarly, the World Bank had slashed its economic growth forecast on Bangladesh by 1.7 percentage points to 4 percent for FY25 due to "significant uncertainties following recent political turmoil" and "data unavailability" early this month.

In its commentary, Fitch Ratings said the country's interim government appointed a new finance minister and central bank governor after taking office on August 8.

The previous Awami League government was ousted by a mass uprising on August 5 following weeks of unrest stemming from a brutal crackdown on student protests aimed at reforming the quota system for state employment.

"This political transition has increased economic policy uncertainty in the near-term. But under our baseline, we expect its impact on the country's sovereign credit profile will be temporary," it said.

On the other hand, the change could improve credit metrics in the medium-term, for instance if reforms are pursued and governance standards improve, it added.

Fitch Ratings also informed that Bangladesh was facing some external financing pressures before the protests began around mid-July.

Earlier in May, the agency had downgraded Bangladesh's rating to B+ from BB- due to sustained weakening of the country's external finances, which it believes will be challenging to reverse even with some policy reforms.

However, the external metrics have been stable ever since the change in leadership, it said.

The commentary by Fitch Ratings comes after more than two months since it said Bangladesh's rating may worsen if the political transition faces challenges or leads to policy paralysis and exacerbates fiscal or external stresses.

Several days before the report by Fitch Ratings in August, another US rating agency called Moody's said changes to Bangladesh's credit rating would depend on if its interim government can maintain political stability and commit to structural reforms.

At the end of July, S&P Global had downgraded Bangladesh's long-term sovereign rating from BB- to B+ in face of deadly protests across the country.

In its commentary, Fitch Ratings said the inflow of remittance to Bangladesh from its workers abroad improved to $2.4 billion in September after falling to $1.9 billion earlier in July.

Garment exports, a key source of export revenue for the country, rose by about 7.2 percent year-on-year in August despite some reported damages to production units amid the protests.

Bangladesh's foreign reserves have remained largely stable during this period. As of October 8, the country's forex reserves stood at $19.8 billion, down from $20.5 billion on July 31.

Fitch Ratings also said Bangladesh Bank raised its policy rate by 100 basis points after the new governor took office.

Besides, the country's local currency depreciated after Bangladesh Bank shifted to a crawling peg system for determining exchange rates in May, suggesting that pressure on its forex reserves will reduce.

"Initial steps by the interim government suggest that the authorities are attempting to stabilise the economy. For instance, a taskforce for banking sector reforms has been set up," it said.

"However, there are significant risks to our baseline expectations," it added.

And while a general election is due, its timing remains unclear. Additionally, political gridlock following the elections or the return of violence cannot be ruled out given the strong political polarisation over the past decade, Fitch Ratings said.

In particular, Bangladesh's credit profile would be affected if this further weakens the country's external metrics and leads to lower foreign reserves.

Significant slippage on key targets of a 42-month loan programme of the International Monetary Fund, which began in January 2023, could also disrupt access to other multilateral funding, it added.