In November 2019, Moody’s downgraded the Government of Lebanon’s issuer ratings to Caa2 from Caa1 noting that the ratings remain on review for further downgrade in the next 3 months.
Lebanon mainly depends on remittances and transfers from abroad which fuel the country’s growth and fund its large twin budget and current account deficits. However, total deposits in commercial banks have declined since the end-2018 and the balance of payments has deteriorated. The downgrade came amid the widespread social protests and the recent resignation of the government which have
delayed the passage of the 2020 budget and implementation of the agreed reforms necessary to unlock CEDRE investments and/or secure financial support from Gulf Cooperation Council (GCC) allies that are essential to ease immediate liquidity risks and allow the economy to recover over the longer term. The downgrade to Caa2 reflects the increased probability of a debt rescheduling or other liability management exercise that may constitute a default under Moody’s definition. Moreover, the political instability might lead to a further increase of capital outflows and therefore threatening the viability of the peg.
Lebanon is able to manage its debt in the near-term and limit losses since the central bank holds the government securities. According to Moody’s estimations, “the BdL has a usable foreign exchange buffer of about $5-10 billion left to draw from based on the sum of changes in the economy’s net foreign assets in the past, or when adjusting the stock of foreign exchange reserves at $29.3 billion as of September 2019 for banks’ negative net foreign asset position at over $25 billion. In the absence of new net inflows, these $5-10 billion will likely be consumed by the government’s forthcoming external debt service payments estimated at $6.5 billion this year and next, including the $1.5 billion November 28 maturity.”
Worth mentioning that Lebanon has not defaulted on bonds or loans since 1983.