Standard & Poor’s (S&P) Global Ratings, the international rating agency, placed on October 25, 2019 Lebanon’s sovereign ratings on “CreditWatch with negative implications” and lowered its transfer and convertibility (T&C) assessment of the country from “B+” to “B-”. This decision came in light of the recent social uprising and mirrors the swelling fiscal and monetary pressure that could emanate from receding foreign currency inflows to the country. More particularly, the agency considered that depositor confidence could be undermined by the prevailing uncertainties, which could in turn take a toll on foreign exchange reserves at Banque Du Liban (BDL). These reserves should, however, remain ample enough to meet the government’s near-term financing needs (including maturing Eurobonds of $1.5 billion and coupon payments of $1.0 billion in November) and Lebanon’s current account deficit (expected to reach $13 billion by end of 2019), always according to the report. It is worth noting that S&P had projected the value of usable foreign currency reserves at BDL to reach around $19 billion by the end of the current year. It also mentioned the $2.3 billion hike in BDL’s “official” foreign currency reserves during the months of July and August and attributed said hike to the several rounds of financial engineering operations introduced by the Central Bank. The agency, however, questioned the ability of any future financial engineering schemes to counter deposit outflows, which have already aggregated to about $2.1 billion during the first eight months of 2019, as well as the sustainability of such schemes given their increasing cost. In a related note, the report mentioned that a shortage of U.S. dollars was recently witnessed leading to several protests, following which BDL announced that it would be guaranteeing enough dollar supply for importers of hydrocarbons, medicine, and wheat through commercial banks. It is worth highlighting, in this vein, that the deposit dollarization rate at banks has neared its 2007 all-time high of 73%. From another standpoint, the report pointed to the emergence of a new challenge for authorities following the latest social uproar, making it harder to adopt reforms that aim at slashing the budget deficit while simultaneously preserving social stability. In fact, the raging protests prompted former PM Hariri to announce a new policy package that aims at reducing Lebanon’s fiscal deficit to 0.63% of GDP for the year 2020 through a large set of stringent actions, of which: slashing the salaries of current and previous ministers and deputies, halving debt-servicing costs by the Central Bank, and imposing a single-time tax of 2% on banks’ turnover. The policy package made sure to annul all tax adjustments that were recently introduced and to include various structural measures such as accelerating the approval process for new power plants, introducing new legislations to combat corruption, and privatizing selected public institutions. The proper implementation of this package should fuel foreign currency inflows to the country while unlocking some of the pledged funds during the “CEDRE” conference. In the same vein, S&P underlined that despite the growing downside risks, the Lebanese government has always met its commitments on time even during the toughest of times. Gazing into the future, the agency projected Lebanon’s budget deficit to average 9.5% of GDP throughout the 2019-2022 period, with its gross public debt climbing to 157% of GDP by end of 2022, compared to 140% in 2018 and 130% in 2019 (the 4^th highest among S&P-rated sovereigns).

Rating action-wise, the agency announced that it would consider downgrading Lebanon’s sovereign ratings in the event the government failed to address the mounting economic and social pressures in a manner that reinstates depositor confidence, especially if accompanied by a weakening currency peg, jeopardizing the country’s ability to meet its debt requirements and external financing needs. On the other hand, the agency unveiled that it would affirm the country’s sovereign ratings in the event the government succeeded at bolstering economic growth and taming public debt, which could be made possible by the implementation of the necessary reform agenda. It went on to claim that a positive rating action is even possible if sizeable donor funds were obtained from the international community in a manner that can attenuate the escalating fiscal pressure and strengthen confidence in the peg of the Lebanese pound. Either way, the agency specified that it should resolve the concerned CreditWatch within the upcoming three months.

In a similar context, S&P Global Ratings placed on October 28, 2019 the long and short-term ratings of three Lebanese banks, namely Bank Audi, BLOM Bank, and Bankmed, on “CreditWatch with negative implications”, in line with the sovereign. According to the report, this means that banks’ ratings could be downwardly revised following a similar action on Lebanon’s sovereign rating, or in the event the concerned banks’ funding profile or liquidity position sharply deteriorate. Moreover, the agency spotted the light on the high “operational, funding, and asset exposure” of Lebanese banks to the local economy and the sovereign, with their sovereign exposure constituting around 69% of their assets and over 8x their core equity at end of May 2019. Banks’ placements with BDL also represented some 57% of their combined assets by end of July.