Moody's Investors Service says that the government of Lebanon's recent voluntary debt exchange is supportive of its B3 ratings.
Last week, the government of Lebanon exchanged 83% of its foreign currency bonds maturing over the remainder of 2009 (which had a total face value of USD2.3 billion) for longer-dated foreign currency bonds set to mature in 2012 and 2017. The yields of the new bonds range between 7.5% and 9%, representing a spread over equivalent swap rates of between 547 and 612 basis points. (The exchange is not classified as a "distressed exchange" according to Moody's definition because it was conducted on a voluntary basis.)
"This exchange improves the structure of the government's very large debt stock by extending its average maturity and reducing roll-over risk in the near term," explains Tristan Cooper, a Vice President-Senior Analyst in Moody's Sovereign Risk Group. At the end of 2008, the central government's gross debt approximated USD47 billion or 162% of GDP, one of the highest levels in the world. Around 45% of the debt is denominated in foreign currency. Following the debt exchange, the government's next significant Eurobond maturity is of around USD1.1 billion due in March 2010.
Moody's changed the outlook on Lebanon's low B3 sovereign ratings to positive from stable in December 2008 and this debt exchange supports Moody's upbeat view of the credit. "Despite the large size of its debt and a wide fiscal deficit, the government retains a good ability to finance itself owing to a reliable domestic investor base," says Mr. Cooper. "Furthermore, the bulk of the public debt in Lebanon is held by domestic commercial banks, which remain willing and able to purchase and roll over government securities, as indicated by this debt swap."
Moody's also notes recent encouraging events for Lebanon. On 4 March 2009, a meeting between leaders of Syria and Saudi Arabia, Egypt and Kuwait produced a joint statement signaling the tentative beginnings of a rapprochement that could bode well for Lebanon's domestic politics.
Furthermore, the central bank's foreign exchange reserves have risen significantly over the past year as deposits have flowed into Lebanon's commercial banks and the rate of dollarisation has fallen -- a sign of increased confidence in Lebanon's banking system and the country's political and economic prospects.
However, Moody's believes that Lebanon's ongoing political and economic challenges justify its low sovereign ratings. The country's upcoming parliamentary elections in June 2009 could lead to heightened tensions. There is also a constant threat of renewed conflict between Israel and Hizbullah. Furthermore, Lebanon's economy is hampered by wide twin deficits, a stifling public debt burden, a dilapidated infrastructure and an ineffective government. The global economic crisis is also likely to impact the country, particularly through lower inward remittances and trade flows.
The last rating action was implemented on 11 December 2008, when Moody's changed the outlook to positive from stable on Lebanon's B3 local and foreign currency government bond ratings.
