S&P Global Ratings maintained in their RatingsDirect, issued on 21 February 2022, Lebanon’s Ratings at SD for Foreign Currency and at CC for Long-Term Local Currency. The foreign currency rating carries no outlook being at SD; however, the outlook on long-term local currency rating is negative.
S&P’s rationale for the ratings is largely based on the fact that “negotiations with investors on a restructuring agreement are unlikely to take place in the absence of credible policy reforms, due to prolonged delays in government formation amid internal political disputes. Disagreements between key political institutions on the causes and scope of the country’s crisis and the path to restructuring, such as the treatment of depositors, are also impeding the process. Without strong commitment to implement structural economic, fiscal, and monetary reforms and a policy anchor provided by an IMF program, we expect restructuring negotiations will be drawn out”. In addition, the position on the CC rating for Lebanon’s local currency debt “reflect our expectation that its restructuring is likely as part of a broader plan to set public debt on sustainable footing”.
The RatingsDirect pointed out that in February 2022 “the IMF noted that progress had been made in agreeing on the necessary reform areas to address the crisis in Lebanon. These include: implementing fiscal reforms; restructuring the financial sector; reforming state-owned enterprises, particularly, the energy sector; strengthening governance, anti-corruption, and anti-money laundering and combating financing of terrorism frameworks; and establishing a credible monetary and exchange rate system”. However, the RatingsDirect is not hopeful, as addressing Lebanon’s structural weaknesses requires strong political will and a shared vision across the political class, of which there is currently scant evidence. Besides, finding agreement among the political class on the solutions to these longstanding issues and then implementing them will likely remain challenging, made worse by parliamentary elections scheduled for May 2022 that will further delay the policy reform process, given the unpredictable political environment. Also, financial support from multilateral organizations and bilateral partners will be crucial to the success of any reform plan. However, the disbursement of donor funds is contingent on the implementation of policy reforms.
Lastly, the RatingsDirect also made three interesting points: first, growth in 2022 will be at 1% but mostly come from the base effect; second, the proposed 2022 budget, though includes one exchange rate, but uses different valuation adjustments for revenue and expenditure items to reflect different rates; third, the current Sayrafa rate is hovering at approximately LBP 20,000 to $1, however, the gap between this rate and the parallel market rate has been successfully narrowed considerably.