Moody’s has maintained Lebanon’s issuer rating at C, with a revised outlook to stable from no outlook. The C rating indicates Moody’s expectation of bondholder losses surpassing 65%, attributed to Lebanon’s ongoing default since March 16, 2020. The country grapples with an economic, financial, and social crisis, with weak institutions and governance unable to address the challenges. The stable outlook reflects the anticipation of a persistently C rating due to probable significant losses for private creditors and a volatile economic environment fueled by political deadlock and weak institutions. Lebanon’s exposure to the Israel-Hamas conflict further hampers economic activity, reversing gains in the tourism industry. The local and foreign currency ceilings, both at Ca level, highlight the unreliability of institutions, geopolitical risks, and the trend toward effective dollarization amid current currency transfer restrictions. The foreign currency restrictions are expected to persist until a comprehensive debt restructuring occurs, while informal cross-border transfers bypass the banking system.
Rationale for Affirming the C Rating
The affirmation of the C rating is grounded in the ongoing challenges posed by very weak institutions, causing significant delays in executing a comprehensive debt restructuring. With anticipated losses surpassing 65%, the government’s default on eurobond debt service in March 2020 set the stage for the restructuring, yet subsequent administrations have struggled to implement it. The intertwined nature of the public sector, Banque du Liban (BdL), and commercial banks necessitates a holistic restructuring to restore debt sustainability, crucial for accessing IMF financial support.
Moody’s assessment considers the substantial public debt, exceeding 170% of GDP pre-default, compounded by additional losses from economic contraction, currency devaluation, and soaring inflation at 215.4% by October 2023. Private sector investors are expected to incur losses exceeding 65%, prompting the C rating.
The trajectory of debt restructuring hinges on the government’s ability to implement policies. However, institutional gridlock is evident in the parliament’s inability to elect a new president post the expiration of former President Michel Aoun’s term in October 2022. With a caretaker government and an acting governor at BdL, the prolonged political vacuum heightens the risk of a protracted economic, financial, and social crisis, accentuating Lebanon’s historical institutional challenges.
Environmental, Social, and Governance (ESG) Considerations:
Lebanon faces a lower credit impact score (CIS-5) due to pronounced ESG risks. Governance constraints, declining wealth, and an overextended government balance sheet contribute to low resilience to environmental and social risks. Environmental exposure is evident in poor solid waste management and inadequate drinking water safety. Social risks include substandard access to basic services, unreliable electricity, unfavorable demographic shifts, and governance challenges exacerbated by sectarian fragmentation and corruption.
If there are any upward movements in Lebanon’s sovereign rating after the debt restructuring, they are likely to be limited for a considerable period of time. For Lebanon’s rating to migrate above levels associated with very high probability of future re-default and significant losses, 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 – such as economic growth, interest rates, privatization revenue, and the ability to generate and sustain large primary surpluses – were to evolve in a way that would ensure debt sustainability in the future.
Key Economic Indicators (2022):
GDP per capita: $13,188
Real GDP growth: -2.6%
Inflation rate: 122%
General Government Financial Balance/GDP: 1%
Current Account Balance/GDP: -26.7%
External debt/GDP: 319.6%