S&P Global Ratings on Tuesday lowered its long-term foreign and local currency sovereign credit ratings on Bangladesh from 'BB-' to 'B+', affirming its short-term rating ‘B' for the country.

The outlook on the country’s long-term ratings is stable. It also revised the country’s transfer and convertibility assessment to 'B+' from 'BB-', it said.

The stable outlook on Bangladesh reflects the view that its per capita real growth rate will remain very strong compared with peers, despite near-term headwinds from tighter financial conditions that downside and upside risks to its external balance sheet are now broadly balanced, said the ratings agency.

It could lower its ratings on Bangladesh if the country's external position further worsens such that, for example, narrow net external debt surpasses 100 percent of current account receipts on a sustained basis.

A lower generation of current account receipts than expected, a higher overall current account deficit than the forecast, or a failure to materially boost foreign exchange reserves could all contribute to downward pressure on these metrics, S&P said.

The agency also says it could raise Bangladesh’s ratings if the country materially improves its external metrics.

That improvement would likely be indicated by current account receipts or foreign exchange reserves rising substantially beyond the forecasts, such that gross external financing needs remain lower than 100 percent of current account receipts plus usable reserves on a sustained basis.

The downgrade reflects persistent pressure on Bangladesh's external metrics, marked in particular by a continued decline in foreign exchange reserves, the rating agency said. This has occurred despite import compression measures enacted by Bangladesh Bank and a smaller current account deficit.

Gross external financing needs, by the agency’s measures, now exceed the sum of current account receipts and usable reserves, the S&P said.

“The agency’s 'B+' ratings on Bangladesh reflect the country's modest per capita income and limited fiscal flexibility owing to a combination of low revenue-generation capacity and high-interest burden. Evolving administrative and institutional settings represent additional rating constraints.”

The S&P weighs these factors against consistently strong economic growth, a moderate public debt burden, and an external position supported by broad engagement with bilateral and multilateral development partners, large remittances from overseas Bangladeshi workers, and a globally competitive garment manufacturing sector.

In its overview of Bangladesh’s economy, S&P notes that the country’s external liquidity is weakening, as indicated by the sustained depletion of its official foreign exchange reserves. It also added that macroeconomic policies enacted in May could help, but progress will be gradual.

Meanwhile, a high-interest expense ratio and a narrowing but still relatively large budget deficit will continue to weigh on the agency’s fiscal assessment, it said.