Fitch Ratings Downgraded Lebanon’s Long term Foreign Currency Issuer Default Rating (IDR) from CCC to “CC” on December 12th 2019

In its report issued on Dec. 12th 2019, Fitch Ratings explains the mounting financial pressure on Lebanon, such that, “a government debt restructuring or default is probable owing to acute political uncertainty, de facto capital controls and damaged confidence in the banking sector that will deter capital inflows needed for Lebanon to meet its financing needs.”

The rating agency downgraded the country’s IDR to “CC” and analyses the rating’s drivers in its report, summarized as follows:

  • The ongoing political volatility, which risks widening “the rupture” between the government and protesters.
  • Eroding confidence in the banking sector, driven by the banks’ closures and de facto capital controls imposed by banks.
  • Rising dollarization and the emergence of a parallel exchange market, which signals “widening cracks in the peg of Lebanese pound to the US dollar”.
  • BDL’s Circular dated Dec. 04th 2019, which indicates the central bank is “failing to pay its obligations in full […] intensifying financial pressure[…]”.
  • BDL’s “gross foreign reserves provide a buffer for […] near term debt service obligations” but “[…] absence of inflows implies an ongoing decline in FX reserves”.
  • The government’s fiscal position “looks increasingly unsustainable”.

Fitch also analyzed in its report, the dominating reality in Lebanon as follows:

  • A political resolution combined with credible structural reforms and financial support to relax mounting financial pressures, are conditional upon substantial positive developments occurring in the market, in parallel.
  • The USD3.5B pledged by the GCCs and GCC-linked multilaterals as part of the Cedre $11B of loans and grants, has not been disbursed due to geopolitical pressures linked mainly to Hizbollah.
  • Cedre funds remain locked, conditional upon reforms required of Lebanon.
  • The ISGL meeting in Paris Dec 11th 2019 promises support to Lebanon, “provided a new government is formed that respects the demands of protestors and implements reforms.”
  • A potential IMF exceptional package to Lebanon would “almost certainly” be tied to restructuring government debt, given its substantial levels which exceed the IMGF quota.

Source: Fitch Ratings, Dec 12th 2019

 

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