Fitch Ratings has revised its outlook on Bangladesh's Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable, and affirmed the IDR at 'BB-'

An IDR represents an assessment of an issuer's (such as a company or government) relative likelihood of defaulting on its financial obligations. A Long Term Foreign Currency IDR indicates its ability to meet its financial obligations in foreign currency in the long term.

Fitch's rating action today means the reputed credit rating agency is particularly concerned over Bangladesh's ability to repay its foreign currency debts, although the situation for now remains 'manageable'.

The downgrade was driven in large part by the country's dwindling foreign exchange reserves, and the fact that it has been met with an inadequate response.

"The Negative Outlook reflects a deterioration in external buffers, which has increased vulnerability to shocks. It also reflects our view that the country's incremental policy response, including exchange-rate system changes, and continued support from external official creditors, has been insufficient to stem the fall in foreign reserves and resolve domestic US-dollar liquidity strains," Fitch said.

"We forecast foreign-exchange reserves to stay under pressure, driven by rising imports and foreign-currency intervention by the central bank. We estimate that gross reserves fell by 19% in 9M23 (first 9 months of 2023) to USD27.3 billion, or USD21.5 billion excluding the portion allocated to the Export Development Fund and Bangladesh Investment Development Fund," it added.

Fitch also said the country's foreign-exchange reserve outlook is challenging, amid a still-managed exchange rate, elevated oil prices and a further relaxation of import restrictions, which it expects will widen the current-account deficit through to 2025.

However, Fitch had better things to say while affirming the IDR.

"Ratings are affirmed, reflecting Bangladesh's manageable external-debt repayment profile, still-favourable growth prospects and government debt that is below that of peers. This is balanced by low government revenue and per capita income as well as a weak banking sector and deficient governance indicators," said Fitch.

Despite the lower external buffers, Fitch said Bangladesh should be able to meet its external debt obligations over 2024-2025, since external debt service remains low relative to peers.

Analysts and bankers said if a country's outlook is revised negatively, it may face higher borrowing costs when it seeks to raise funds in international financial markets.

This can make it more expensive for the government and businesses in the country to access international capital, they said.

Another impact may be on foreign investment as a negative credit rating outlook may mean less willingness for foreigners to invest in a country with a deteriorating credit profile.