Moody’s upgrades Lebanon sovereign ratings

Moody's Investors Service has upgraded Lebanon's government bond ratings to B1 from B2, continuing on the trends that led it to place Lebanon's sovereign ratings on positive outlook in December 2009. These included a sustained improvement in external liquidity, strengthened ability of the country's resilient banking system to finance fiscal deficits, and an amelioration of the domestic political situation following the formation of a consensus government last November.
Moody's has also upgraded Lebanon's country ceiling for foreign currency bank deposits to B1 from B2 and its country ceiling for foreign currency bonds to Ba3 from B1. Lebanon's local currency country ceilings remain at Ba1. The outlook on sovereign ratings is now stable, from ‘positive’ in December 2009.
"Lebanon's public finances have proven resistant to serious political and economic shocks in recent years. This is due to the strengthened resilience of the country's banking system, which is the government's primary creditor," explained Tristan Cooper, Senior Credit Officer in Moody's Sovereign Risk Group. "Confidence in Lebanon's financial system has been bolstered by the central bank's large cushion of foreign exchange reserves and its effective regulation of domestic banks."
Central bank foreign exchange reserves rose to US$ 26.9 bln in February, up from US$ 9.8 bln at the end of 2007. This places the country in a more favourable position to absorb financial shocks (including any potential rise in deposit dollarisation), while also providing ample cover for the government's maturing foreign currency debt.
The central bank also holds a large amount of gold, worth US$ 10.1 bln in February. Although the liquidity of the gold could potentially be constrained given that parliament must approve its sale, its value is a further prop to confidence.
The country's commercial banks remain liquid, are well-capitalised and have continued to attract deposits from abroad. Total bank deposits increased by around 20% in the 12 months to February.
While there is a risk that bank deposits could fall in the event of a serious political or economic upheaval, Moody's observes that they have displayed a high level of stability during previous crises. The bulk of deposits are sourced from the country's large and loyal diaspora. Moody's outlook for Lebanon's five rated banks is stable, as announced on March 17.
" Moody's notes Lebanon's significant political and economic vulnerabilities. These include wide twin deficits, a very high public debt overhang, a tense domestic political environment, and the persistent threat of an escalation with Israel," Cooper said. The rating agency cautioned that there is no guarantee that the government's weak policy effectiveness will improve despite the formation of a consensus government in November and relative political stability since. Moody's also remains concerned by the sluggish progress in implementing much-needed economic reforms.
"Such downside risks are adequately encapsulated in Lebanon's low ratings and are offset to some extent by the country's large buffer of external liquidity," Cooper added.
Nonetheless, absent significant further improvement in government finances which also lessens dependence on domestic bank funding and a reduction in political event risk, Lebanon's government ratings will remain bound in the B rating category.