Standard & Poor’s Global Ratings (S&P), the international rating agency, maintained Lebanon’s long-term and short-term foreign and local currency ratings at “B-” and “B” respectively but changed the country’s outlook from “Stable” to “Negative” in its March 1^st rating update.

In detail, S&P affirmed the ratings on Lebanon building on its expectations of recovery in deposit inflows as a result of the formation of a new government on January 31, 2019, which was delayed nine months, in addition to the donor pledge from Qatar and possibly from Saudi Arabia and BDL’s ability to help service the government’s foreign currency debt, with the latter two factors ensuring supporting the government’s borrowing requirements and external deficit for twelve months. The agency also commented that the new government is showing its willingness to implement reforms agreed upon during the CEDRE conference in 2018, as evidenced by the policy statement it ratified specifying its agenda of reform measures. The agency, however, stated that the implementation of said reforms “remains uncertain”. It also suggested that investor confidence will improve in the event reforms are implemented and the 2019 budget is finalized. In figures, and following the release of official economic data pointing to a 0.6% real GDP growth in 2017 (as compared to a previous estimate of 1.4%), S&P projected Lebanon’s economic growth at a mere 0.5% in 2018. In this context, the agency mentioned that investment and consumption were subdued as a result of political uncertainty, the reduction in BDL’s subsidized mortgage lending, and the approved tax hikes in 2018. The agency projected growth to reach 2.5% by the year 2022, remaining way below the 9.2% average growth recorded between 2007 and 2010. Said expected growth is based on the assumption of the partial implementation of the Capital Investment Program (CIP), which was developed in collaboration with the World Bank. Another assumption underlying the growth estimates for the coming period is a frail performance of the country’s “traditional growth drivers”, namely its real estate, construction, and tourism sectors. On the public finances front, S&P estimated Lebanon’s net debt-to-GDP ratio at 133% in 2018, the third highest among S&P-rated countries after Venezuela and Greece. In fact, S&P indicated that the country’s public finances continue to be hindered by sizeable and growing interest payments (which erodes about 50% of the government’s revenues, the highest rate among S&P-rated countries) and transfers to EDL (amid increasing oil prices). The agency estimated that the fiscal deficit reached 11% of GDP in 2018, compared to 7% in 2017, and is expecting said deficit to average around 10% of GDP during the 2019-2022 period. The agency also stated that the new government intends to reduce the fiscal deficit by 1% every year for the next 5 years by “reforming the electricity sector and freezing hiring in the civil service”, being a key condition to unlock the pledged funds in the CEDRE conference. Lebanese banks remain the government’s main source of funding according to S&P, with banks’ claims on the public sector representing around 40% of central government debt and BDL carrying nearly 50% of outstanding T-bills. Customer deposit growth is expected to pick up after slowing down in 2018 and yet, non-resident flows might not be enough to meet the high external financing requirements, always according to the agency. The agency highlighted that any withdrawals of non-resident deposits from the Lebanese financial sector have always been only temporary and small-sized even during the toughest of times (such as the assassination of the late PM Mr. Rafic Hariri in the year 2005 and the Israeli aggression on Lebanon in 2006). In parallel, S&P shed light on the important role played by BDL in guiding the macroeconomic and financial policy, and cited the financial engineering mechanism it implemented since 2016, which encouraged non-resident deposit inflows to Lebanon and replenished the country’s foreign currency reserves. As for external trade, S&P foresaw a prevalent large current account deficit, which is expected to average 22% of GDP during the 2018-2022 period. This deficit is expected to slowly decline through 2022, aided by a gradual growth in exports following the opening of the Nassib border between Jordan and Syria in late 2018. From another standpoint, the rating agency mentioned in its report that the government is on the verge of starting with the second round of licensing for offshore blocks in 2019, yet did not account for the impact of any possible discoveries in its projections of economic growth and public finance indicators. It is worth noting that a revision to the outlook from negative to stable is contingent upon the reforms that the government will implement to “improve economic growth and reduce government debt levels over the medium term”. On the other hand, S&P warned that a worsening political and economic situation that could trigger a potential drop in deposits growth rates or contraction in foreign currency reserves, or any weakening in the peg of the local currency, may prompt the agency to downgrade Lebanon’s sovereign rating. A downgrade could also occur in the event the government decides to restructure its debt.