On Feb. 21st 2020, Moody’s Investors Service downgraded Lebanon’s credit rating from “Caa2” to “Ca” and changed the outlook to “stable”. By Feb. 28th, the downgrade of Lebanese banks (BLOM Bank, Audi Bank, Byblos Bank) followed suit with Banks’:
- Long-term local currency deposit ratings fell from Caa2 to Caa3
- Long-term foreign currency deposit was lowered from Caa3 to
- Long-term local currency counterparty risk ratings (CRR) to Caa3, down from Caa1.
- Long-term foreign currency CRRs to Ca, down from Caa1.
- Counterparty risk (CR) assessment to Caa3(cr), from Caa1.
- National Scale ratings (NSR) for deposits to Caa1.lb, from B1.lb
- Blom Bank’s long-term foreign currency deposit certificates to Ca, down from Caa2.
On banks, Moody’s report on Lebanon dating Feb. 25th mainly assessed that: “The 3 rated banks’ overall sovereign exposure (including government securities and BDL placements) was equivalent to around 7-to-9-times their Tier 1 Capital based on […] 2018’s audited financial statements.”
Now, against this backdrop of sovereign and banks’ downgrades amid a critical time for Lebanon what we really need to know – to help assess Lebanon’s current situation vis-à-vis the international community and nationally, inclusive of a potential debt restructuring, reform and external funding needs – is summarized as follows:
The “Ca” country credit rating:
- The agency explains that Lebanon’s Macro profile is “Very weak”e. it reflects a weak governance framework (Score: Caa1) and weak economic fundamentals (Score: b2).
- Moody’s expects that Lebanon’s domestic and external private creditors will incur substantial losses in the 35-65% range, as the country faces an “inevitable near-term debt restructuring”. (Moody’s, Feb. 21st)
- As per the agency, Lebanon is witnessing a “fast deteriorating economic and financial conditions [which] increasingly threaten the sustainability of the Lebanese pound’s peg to the dollar”. The economy also faces a “credit crunch [with] an expected real GDP reduction […] by 2.5% in 2020.” (Moody’s, Feb 28th 2020).
As for Lebanon’s “Stable” Outlook:
- Moody’s assumption and central scenario today is: the likelihood of a debt restructuring in coordination between private and official creditors, and with an IMF economic adjustment program to guarantee the process is “as orderly as possible”. Moody’s also excludes within this scenario any forthcoming external funding as the government has an “extremely weak track record on policy implementation.” (Moody’s Credit Opinion, Feb 21st 2020).
- A potential Upgrade depends on whether the debt restructuring risks diminish and financing conditions “stabilize” along the lines of highly credible policy actions.
- However, a further Downgrade may loom if economic and fiscal reform implementations remain difficult and also if a sudden “de-pegging” of the currency occurs.
On Lebanese Banks’ Lowered Ratings:
- In correspondence with the sovereign downgrade to Ca, lowered banks’ ratings reflect the expected losses to be incurred on Creditors, given banks’ “high exposure to the Lebanese sovereign and its deteriorating financial and economic conditions.” (Moody’s, Feb. 25th)
Moody’s concluded that Lebanon’s economic fundamentals have not materially changed. Meanwhile, the country’s institutions and governance strength as well as the fiscal/financial profile including debt profile have substantially declined which makes Lebanon “susceptible to event risks”.
Source: BLOMInvest Bank; Moody’s Investors Service (End-Feb. 2020 Lebanon reports).