Lebanon’s bond ratings remain stable
Moody’s Investors Service maintained Lebanon’s foreign and local currency government bond ratings at “B1” with a “stable” outlook. It also kept the senior unsecured foreign currency ratings at “B1” and the short-term foreign currency ratings at “NP.” It said that these sub-investment grade ratings reflect Lebanon’s significant political and economic challenges that include wide fiscal and current deficits and the second highest government debt-to-revenues ratio among rated sovereigns, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group.
It pointed out that structural challenges continue to limit the economy’s longer term potential and that economic growth remains vulnerable to potential domestic and external political shocks. The agency indicated that Lebanon’s ratings are supported by the Central Bank’s high level of foreign exchange reserves and gold, which strengthen the confidence in the exchange rate peg and in the financial system despite the weak public finances. It added that Lebanese commercial banks, the government’s primary creditors, remain willing and able to purchase and roll over government debt given their significant resources. It noted that bank depositors, including Lebanese expatriates, have shown a significant resilience to political shocks over the years.
It also pointed out that the government has historically had a strong willingness to service its debt and has never defaulted despite numerous political and economic crises. It noted that the government has a track record of mobilizing donor support such as $7.5 billion pledged by external donors in grants and soft loans at the Paris III donors’ conference in January 2007, of which $1.6 billion was received for direct budgetary support. It indicated that Lebanon’s balance of payments is structurally weak but that it is reinforced by inward remittances from the large number of Lebanese workers abroad.
Moody’s indicated that it would downgrade Lebanon’s ratings in the case of a substantial and sustained withdrawal of bank deposits from the country, which would threaten the banks’ willingness and ability to finance the government. It added that a material change in the government’s willingness to service its debt would also put downward pressure on the ratings.
The agency said that it could raise the ratings in case of a decline in political risks and if there is a significant improvement in government finances, which would reduce the government’s dependence on the local banking sector.
In parallel, Fitch Ratings indicated that the Lebanese economy is likely to improve in 2012 compared to 2011, but anticipated significant risks to growth prospects due to continued domestic political instability, the likely escalation of regional unrest, and the uncertain global environment. It said that the Lebanese economy and the health of the banking system are influenced by the political situation in Lebanon and to a certain extent by that in neighboring countries. It noted that the domestic economy has been stagnant in real terms last year, with the slowdown exacerbated by regional unrest, especially in Syria.
In parallel, the agency expected credit in the banking sector to grow this year but it noted that the growth level is hard to predict as the deterioration in the political situation would discourage domestic and foreign investment.
It added that political instability is unlikely to have a material impact on deposit inflows, which would maaintain the banking sector’s very comfortable liquidity level. Fitch noted that banks operating in Lebanon continue to be exposed to the Lebanese sovereign through their substantial holdings of Lebanese government debt. It pointed out that the ongoing expansion abroad by the larger Lebanese banks should allow for growth that is not dependent on the volatile domestic market. But it said that this expansion focuses largely on countries in the MENA region that are affected by the regional unrest.
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