Moody’s assigned a sovereign credit rating of C to Lebanon. The C rating reflects Moody’s “assessment that the losses incurred by bondholders through Lebanon’s current default are likely to exceed 65%”. In addition, “the collapse of the currency in the parallel market and the concomitant surge in inflation fuel a highly unstable environment”.
Moody’s cited credit strength as the commitment for international donor support conditional on the implementation of an IMF reform program. Whereas credit weaknesses involve increasing exposure to a severe economic, financial and social crisis; weak institutional and governance strength, which delay access to external support; and continued drawdown of external foreign-exchange reserves.
C is the lowest rating and that is mainly behind the decision not to assign an outlook. And for the country’s rating “to increase above levels associated with very high probability of future re-default and significant losses, Moody’s stated that the implied pace of fiscal consolidation and structural reform implementation would have to be much faster than currently expected, over a number of years. A further precondition for a substantial upgrade is that the key drivers of the country’s debt dynamics have to evolve in a way that would ensure debt sustainability in the future”.
In its analysis of recent economic developments, Moody’s mentioned, first, the social risks arising from the severe deterioration of economic conditions which drove the poverty rate to 45% in 2020 compared to 37% in 2019. This has led the World Bank to approve on 12 January 2021 “the Emergency Crisis and COVID-19 Response Social Safety Net Project (ESSN). ESSN amounts to $246 million for emergency cash transfers that will cover 786,000 individuals (a monthly transfer of LBP 100,000 per household member, in addition to a flat amount of LBP 200,000 per household) for three years”.
Second, the continued drawdown of foreign-exchange reserves which is undermining the viability of subsidized key imports. In this context, “as of November 2020, Lebanon’s foreign-exchange reserves have declined to $19 billion from a peak of $36.8 billion in October 2017. Of this amount, 15% of all foreign-currency deposits at commercial banks are mandatory reserves held on behalf of banks (or $16.7 billion), leaving only about $2.3 billion for key imports such as wheat, fuel and medicine at subsidized rates, thus lasting for another six months”.
Third, government formation remains a slow-moving process, and external financial support remains conditional on specific reforms. These reforms include, “making public finances and the banking system solvent again via a comprehensive debt restructuring; legislation to formalize capital controls and the elimination of the current multiple exchange rate system; and comprehensive audits of the central bank and state-owned enterprises”.
Lebanon: Key Indicators
|Real GDP Growth||-6.9||-25||-6.6|
|Budget Balance to GDP||-11.4||-11.7||-11.2|
|Debt to GDP||178.3||214.3||171.3|
|Current Account to GDP||-23.2||-11.8||-10.8|
* EV = (Short-Term External Debt + Currently Maturing Long-Term External Debt + Total Nonresident Deposits Over One Year)/Official Foreign Exchange Reserves