Bangladesh facing heightened energy risk from prolonged Iran war: S&P

The Middle East war poses a greater risk to Bangladesh, Pakistan, and Sri Lanka, and to a lesser extent Laos, due to their high dependence on imported energy and limited reserve supplies, says S&P Global Ratings.

These countries are particularly vulnerable to rising oil prices and potential supply disruptions, S&P noted.

In their base case scenario, the war is unlikely to have a material impact on their sovereign ratings for these countries, but a more prolonged price and supply shock in global energy markets could cause more pronounced credit damage.

At S&P Global Ratings with analyst-driven credit ratings, research, and sustainable finance opinions provide critical insights that are essential to translating complexity into clarity so market participants can unlock opportunities and make decisions with conviction.

Pakistan, Sri Lanka, and Bangladesh are showing signs of economic recovery. The three countries have made progress, but sustained high energy prices and potential disruptions to trade and remittances could derail their fragile economies.

Laos is comparatively less exposed due to its hydropower electricity generation and balanced fiscal position. While still vulnerable to extended energy price and supply shocks, the conditions supporting the positive outlook on our long-term ratings remain intact for now.

“Our ratings on Bangladesh can likely withstand the shorter-term economic disruptions associated with our base case scenario,” said the report by the American credit rating agency.

However, the country faces mounting growth, inflation, and external risks if the spike in energy prices endures longer than they currently anticipate, S&P said. 

The duration of the Middle East conflict and associated price shock, as well as the physical availability of fuel supplies, will be key determinants of the impact on the sovereign's creditworthiness.

Higher fuel prices are likely to arrest the gradual decline in inflation over the next three to six months, and could sap underlying recovery momentum in the economy.

Nearly 50% of Bangladesh's electricity generation is gas-fired, and nearly a quarter of its gas needs are met through imports.

Meanwhile, the economy is almost entirely reliant on imports for crude and refined oil products. Oil supply reserves are likely to be less than one month, after which measures to curb consumption may become more pronounced if imports remain constrained.

While the government and national energy companies have been able to secure some additional gas, diesel, and petrol supplies recently, the availability of these could become scarcer if the conflict endures.

Officials have moved quickly to implement measures aimed at blunting the hit from higher fuel prices. These include a cap on retail fuel prices alongside a temporary rationing mechanism, cuts to operations at fertilizer plants to prioritize gas supply to power plants, and early school closures to manage energy consumption.

The country is already grappling with stubbornly high inflation, which rose to 9.2% in February from 8.6% in January, and an extended moderation in growth following the collapse of the previous government in mid-2024.

The Bangladesh National Party's solid margin of victory in February 2026 elections, and a relatively smooth transition from the caretaker government, mitigates risks of policy paralysis, and could help to restore policy continuity and political stability following a period of heightened uncertainty.

However, policy tools available to the officials will be bound by price pressures, the taka exchange rate, foreign reserve targets, and the government's limited revenue-generation capacity.

Bangladesh's revenue to GDP ratio is among the lowest of all rated sovereigns. It is estimated that it will be around 9% in the current fiscal year (ending June 2026).

The war will also be an unwelcome headwind against Bangladesh's improving external position. Foreign exchange reserves rose to US$29.6 billion as of March 12, 2026, a substantial boost compared to just US$19.7 billion at the same time in 2025.

The country's overall current account balance has improved, too, supported by surging remittance inflows, and despite a slowdown in the ready-made garment export sector.

The accumulation of a more meaningful foreign exchange buffer, and the current account's modest surplus position so far this fiscal year, will help to alleviate the immediate stresses that could arise from a period of acutely high energy prices.

However, a more drawn-out conflict would pressure Bangladesh's economy across a variety of fronts, including through the import channel, which could shift the current account back into a deficit depending on the length and scale of the price shock.