In the week of January 10th 2019, official statements regarding a debt restructuring plan for Lebanon rattled the Eurobonds market, but they were later disregarded and followed by news on Qatar investing $500M in Lebanese government bonds which partially alleviated investor concerns. Nevertheless, the news prompted Moody’s to downgrade the issuer rating of the Lebanese government to Caa1 on Jan.21, 2019 while the outlook was changed to stable from negative.
It is worthy to note that earlier in December 2018, Moody’s changed the outlook on Lebanon’s B3 issuer ratings to negative on the account of the country’s “higher fiscal, liquidity, and external pressures”, but Moody’s also confirmed in the report that “banks’ financial fundamentals have remained relatively resilient” within the operating environment and Lebanon’s banks are also “able to continue to attract deposits […]”.
Moody’s latest downgrade of Lebanon’s credit rating is attributed to the “rising possibility of default” in light of the recent. In its turn, the “stable” outlook is in support of the Lebanese government’s track record of not defaulting on its debt. Nonetheless, Moody’s statement explained that a continued delay in government formation would hinder fiscal consolidation efforts and freeze CEDRE funds – knowing that both factors are considered paramount to avoid a default.
Our take however on the latest downgrade reveals that the probability of a government default is almost null. We take into account that Lebanese banks’ financials remain resilient and able to attract deposits, while BDL also remains committed to cover the needs of foreign exchange transactions for 2019 and at least over the medium term. Moreover, BDL’s foreign assets ended the year 2018 at $39.67B. In addition, given that the Lebanese government have disavowed the recent debt restructuring talks, we find that basing a downgrade report update on such news is a bit far-fetched which leaves the possibility of a government default close to zero.
Source: BLOMInvest Bank; Moody’s Investors Service