S&P: Lebanon’s Ratings Stay at SD for Foreign Currency and at CC for Long-Term Local Currency

The rating agency Standard & Poor’s (S&P) maintained its rating on Lebanese pound bonds at SD for Foreign Currency and at CC for Long-Term Local Currency, with a negative long-term outlook.

S&P’s rationale for the ratings is partly due to Lebanon’s dysfunctional political environment and external security risks weigh on institutional effectiveness. S&P pointed out that following the Lebanese government’s default on its foreign currency obligations in March 2020, the fragmented political environment, limited legal capacity of the caretaker government to enact legislation, and delays in appointing key officials, including a new president and permanent BDL governor, slowed down the economic recovery process. Moreover, the Israel-Hamas war and the Israel-Hezbollah exchange of fire at the Lebanese southern borders increased Lebanon’s security risks.

Moreover, the RatingsDirect, issued on 19 August, 2024, pointed out that Lebanon has a very high stock of general government debt, weak balance of payments, and no monetary policy flexibility. Higher revenues from currency valuation changes, such as for customs taxes and airport fees, along with Lebanon’s spending constraints (due to its default) resulted in a small surplus (on a cash basis) for first-half 2024. But, resumption of foreign bilateral and multilateral concessional debt servicing and adjustment to the public sector salaries led to higher expenses than in 2023.

The RatingsDirect also made some interesting points:

• Lebanon’s agreement with the IMF in April 2022 entails it to implement a set of reforms. Some of these reforms have been implemented like the unified exchange rate but the progress on other requested reforms like the banking sector and debt restructuring is still limited
• The government has not published GDP and fiscal data since 2022. Thus, data in this report is highly uncertain
• S&P expects Lebanon’s real GDP growth to contract by 1.2% this year and 0.5% in 2025 due to many reasons, including high security risks, domestic political paralysis, low investor confidence, disruptions in business activity, the impact of internally displaced people like refugees, and reduced tourism inflows
• Since 2018, consistent deposit outflows, multilateral loan payments, and interventions through the Sayrafa platform have weakened foreign exchange (FX) reserves at the Central Bank. Gross FX reserves, including gold and excluding Eurobond holdings, were equivalent $32.5 billion as of July, 2024, compared to $52 billion by end of 2017. This includes around $10 billion of banks’ required reserves on foreign currency deposits, which is equivalent to $18 billion of usable reserves as of end-2024
• In 2023, inflation rose to 221% due to the currency devaluation and the gradual lifting of subsidies. S&P expects inflation to fall to 40% in 2024 as the pound stabilized, dollarization rates are at high levels, and as inflation is calculated on a yearly basis, and it was in triple digits previously

Lastly, S&P declared that it would raise the foreign currency’s rating from SD, after the completion of the government’s commercial debt restructuring. As for the local currency’s negative outlook, S&P said that it is the result of the lack of restructuring for the local currency’s debt and the shortcomings in public sector administrative capacity.

S&P presented two scenarios for its future ratings. The rating agency would downgrade the local currency rating to SD in case of haircuts or maturity extensions on local currency debt, and in case the government missed local currency principal or interest payments to a commercial creditor.  On the other hand, S&P would upgrade the outlook to stable or raise the local currency rating if domestic economic policymaking improved and the possibility of a distressed exchange of Lebanon’s local currency commercial debt has declined.

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