S&P: Lebanon FC Ratings Affirmed at SD/SD and LC Ratings at CC/C

In its latest ratings on Lebanon, S&P affirmed the “SD/SD (selective default) foreign currency ratings and our CC/C local currency ratings on Lebanon. The outlook on the long-term local currency rating remains negative”. It also forecasted “Lebanon’s economic crisis will continue in 2022, with the fifth yearly real GDP contraction in a row, at 3%”. In addition, it said that as “in April the Lebanese government reached a staff-level agreement with the IMF for a 46-month $3 billion Extended Fund Facility, we view the implementation of the preconditions requested by the IMF and the subsequent program as likely to kick-start Lebanon’s economic recovery and emergence from default. The caretaker government is working on the preconditions for IMF board approval, however, the upcoming presidential election and persisting political deadlock and dysfunction make the timeline for completion unclear”.

The rationale for the ratings is that “we see long-term constraints on Lebanon’s institutional and economic profile, largely stemming from a fragmented political environment organized along confessional lines. The current crisis began as persisting political dysfunction, and weak governance led to falling depositor confidence, feeble economic activity, and large-scale protests, as seen in October 2019”. S&P also portrays a very dire income situation (see table below) as “we estimate GDP per capita fell to $1,300 in 2022 from $8,000 in 2018. Foreign currency shortages have led to substantial currency depreciation. Although the official pegged exchange rate remains Lebanese pound (LBP) 1,507.5 to $1, we use the BdL’s Sayrafa rate to better reflect current economic dynamics, which is currently at LBP 25,800 to $1. The large depreciation of the currency has led to very high inflation, averaging 155% over 2021 and forecast to remain above 100% this year”.

As to the Downside Scenario, S&P indicated that “we could lower the local currency rating to ‘SD’ if the government signals that it will restructure local currency debt”. In case of the Upside Scenario for local currency rating “we could revise the outlook to stable or raise the local currency rating if we perceive that the likelihood of a distressed exchange of Lebanon’s local currency commercial debt has decreased. This could occur if, for example, the government decides a foreign currency restructuring is sufficient to place government debt stock on a sustainable path”. As to for foreign currency rating, “we would raise our long-term foreign currency rating from ‘SD’ upon completion of the government’s bond restructuring. The rating would reflect Lebanon’s post-restructuring creditworthiness, considering the resulting debt burden and macroeconomic policy prospects. Our post-restructuring ratings tend to be in the ‘CCC’ or low ‘B’ categories, depending on the sovereign’s new debt structure and capacity to support that debt”.

S&P Economic Indicators Forecasts: