Moody’s Investors Service has affirmed Lebanon’s B2 government debt and issuer ratings and maintained the negative outlook, while the short-term rating is affirmed at (P)Not Prime reflecting the credit support derived from the demonstrated fiscal resilience and strong liquidity position, which have been maintained despite the country’s continued political vacuum.
In particular, banking sector deposits have continued to grow and the central bank has maintained high reserve levels, while the debt structure has improved over time.
However, the negative outlook recognises the downside risks associated with the delay in policy action to reduce the fiscal deficit, including passing budgets, subsidy reforms and raising new revenue. In the absence of policy action, the deterioration in the government’s fiscal deficit and debt burden will accelerate. The negative outlook also captures the increased risk to the country’s financing capacity as a result of a slowdown in deposit growth, a large current account deficit and the elevated political and geopolitical risks that Lebanon is facing.
The rating action also applies to the senior unsecured rating and senior unsecured MTN programme rating, affirmed at B2 and (P)B2, respectively.
Moody’s said that despite the destabilising effects of the Syrian conflict and deep sectarian divides, the economy and banking sector have so far proven resilient to domestic and external shocks. The country has been without a president since May 2014, legislative elections have been postponed and key reforms delayed, as reflected in last year’s waste disposal crisis. Nonetheless, growth has remained positive (albeit weaker than the previous decade average) and large foreign reserves support confidence in the US dollar peg.
Lebanese commercial banks, the government’s primary creditors, remain willing and able to purchase and roll over government debt given their large deposit-funded resources. The domestic banking system benefits from continued deposit inflows from the Lebanese at home and abroad.
Despite the country’s political instability, investor confidence has remained solid, with deposits increasing 4.8% year-on-year as of March (albeit down from 6.0% at end-2014) and deposit dollarisation stable.
In addition, the government’s debt structure has improved, with a relatively high maturity of 4.5 years on government securities lowering the government’s borrowing requirements and providing some protection against future increases in global risk premiums and interest rates.
The central bank’s gross foreign exchange reserves have remained high and stable and amounted to $38.4 bln as of March. Combined with about $11.4 bln in gold reserves, they support Lebanon’s rating by bolstering confidence in the exchange rate peg and the financial system despite weak public finances. The reserves cover external debt payments due in the year ahead. A related credit strength is the large remittance and deposit inflows, which continue to support the balance of payments and banking system. Net remittances reached $3.6 bln in 2015 (7.0% of GDP), while new private sector deposits in the banking system amounted to about $7.2 bln (14.1% of GDP).
Although still subdued, real economic growth performance has remained positive in the past few years, reflecting the resilience of Lebanon’s large consumption base. Moody’s expects growth to pick up to 1.7% this year from an estimated 1.3% in 2015, supported by some improvement in tourism, the pass-through effects of lower oil prices and the central bank’s stimulus packages. Lebanon’s income level also supports the B2 rating; Lebanon’s average income level on a PPP basis of USD18,239 is higher than the median for B-rated countries.
