Moody’s Affirms C Rating for Lebanese Government

Moody’s report dated 15 September 2020 affirms Lebanon’s credit rating to C as downgraded on 27 July, with no outlook assigned. Noting that C is the lowest rating on Moody’s rating scale, this decision is based on the recognition/tracking of high losses to the private sector.

This report mainly tackles four pillars affecting Lebanon’s credit profile, starting from Economic strength, Institution and government strength, to Fiscal strength and susceptibility to event risk.

Economic strength score ‘b3’ reflects Lebanon’s weak economic capacity in handling shock and in achieving growth. The country’s small size along with the suppressed regional borders limited flexible economic activities; the devaluation of the Lebanese currency and lack of access to foreign currency deposits also resulted in import compression. The deteriorating economic conditions and dampened productivity led to an upsurge in inflation reaching more than 110% on a year-over-year basis as of July from 6.7% at the end of 2019.

Institution and government strength score ‘caa3’ records the accumulation of debt and the default on Eurobonds that took place on 16 March. The deteriorated score reflects weak governance; translated in weak corruption control and political stability. Moreover, Worldwide Governance Indicators (WGI), a global comparison of governance strength, ranks Lebanon amongst countries with poor performance. Noting that sovereign countries sharing the Caa3 score as Lebanon are Iraq, Gabon and Democratic Republic of the Congo.

Fiscal strength score ‘ca’ assesses the debt structure driven by accumulation of deficits and unstable foreign exchange rate. Moreover, a weak fiscal policy hinders sovereign’s ability to carry debt and therefore pushes bondholders to default in the hope of restoring sustainability. Moody’s expects that the debt-to-GDP ratio will increase to more than 200% of GDP in 2020. As a result, the government had set a debt restructuring plan in April but lacked international support including BDL and the banking system due to inconsistency with the IMF’s requirements.

Forth, the Susceptibility to event risk score ‘ca’ includes political, banking sector and government liquidity risks. The score also reflects the limited funding sources of the government and of the foreign exchange reserve drawdown. According to Moody’s, the intensified tension politically and geopolitically is a result of withdrawal of the US and Iran deal and due to the imposed US sanctions on Hezbollah. Moreover, US Treasury issued sanctions for two Lebanese ministers accused of their engagement in corruption.

The appointment of a new government and the implementation of specific reforms remain key solutions for Lebanon’s crisis. In details, the next government will focus mainly on implementing long-overdue economic reforms, fighting endemic corruption in the public administration and reforming the electricity sector. These reforms will lead to the resumption of talks with the International Monetary Fund for a requested $10B bailout package and unlock foreign assistance from the international donor community.

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