Moody’s drops Lebanon rating to ‘negative’

Moody’s Investors Service has lowered the outlook on Lebanon‘s B3 foreign currency government bond rating to negative from stable due to the ongoing deterioration in the country’s domestic political environment following the resignations of six opposition ministers from the cabinet this month and yesterday’s assassination of the minister of industry.

Moody’s believes that the resignations by the ministers, most of whom were Shiite, has undermined the government’s standing, further calling into question its ability to maintain political stability or implement much-needed economic reforms. The assassination of the Christian minister of industry has emphasised the fragility of the current political situation.

“Our B3 foreign currency government bond rating for Lebanon already reflects a high degree of political and economic risk,” says Tristan Cooper, Moody’s VP-Senior Analyst. “However, it rests on a number of assumptions that could be weakened by the escalation in political tensions.”

Moody’s has maintained a stable outlook on Lebanon’s B3 foreign currency government bond rating since March 2005 and throughout this summer’s devastating conflict between Hezbollah and Israel based on the assumptions that: (i) Lebanon’s current government has a proven strong willingness to service its massive debt burden; (ii) depositors in Lebanese banks (mostly Lebanese expatriates or wealthy Gulf Arabs) will maintain their confidence and that the base of bank deposits will  continue to grow over time, enabling local banks to finance the large fiscal deficit; and (iii) Lebanon will continue to receive external financial support in times of crisis.

“Moody’s considers that recent events have increased the probability that the current government could fall or its composition be significantly altered, which may in turn compromise the government’s willingness to service the large public debt. Default is sometimes considered as a policy option in times of extreme fiscal pressure,” says Cooper.

“In addition, the confidence of bank depositors could be undermined by disruptive political developments or, potentially, the adoption of less market-friendly policies, although we note that depositors have proven remarkably resilient during previous political crises,” says Cooper.

“Finally, a change of leadership or a retreat from economic reform would reduce the likelihood of additional financial assistance from Western or Gulf Arab donors, who have previously supported Lebanon in times of difficulty, including during the recent conflict with Israel.”