Standard & Poor’s Global Ratings (S&P), the international rating agency, downgraded Lebanon’s long-term and short-term foreign and local currency ratings to “CCC” and “C” from “B-” and “B” respectively with a “Negative” outlook in its November 15 rating update. In addition, the rating agency revised Lebanon’s transfer and convertibility assessment to “CCC” from “B-“. As per the agency, the rating downgrade emanates from the rising constraints on the government’s funding model which is reliant on bank deposit inflows especially from non-residents. In details, the rating agency pointed out that depositor confidence has worsened recently as a result of the local political unrest, prolonged bank closures and the enforcement of some restrictions on foreign exchange transfers and operations by some individual banks. In addition, the rating agency commented that the risk of a prolonged political vacuum increases policy uncertainty while also stating that the formation of a “largely technocratic government” within a period of one month may result in alleviating social tensions and supporting depositor confidence. However, the agency reflected that potential reforms may not be sufficient to markedly alter the sizeable economic and financial distress, projecting in this regard the government’s deficit to average 11.6% of GDP over the 2019-2022 period and an increase in the gross public debt to GDP ratio from around 140% in 2018 to just below 169% in 2022. The agency also expects the government to rely on BDL’s FX reserves (standing at $34.5 billion) to finance its foreign currency debt obligations of $2.5 billion in 2019 and some $2.5 billion in 2020. In this regard, S&P projected BDL’s foreign currency reserves to further decline on the back of the higher capital outflows and rising dollarization levels. Always on the reserves front, the agency uncovered that whilst Lebanon’s FX reserves (including gold reserves) stand at a “reasonably high” $48 billion, it estimates the usable reserves to stand at a much lower $18 billion by end of 2019. The agency also commented that while BDL’s net FX position is significantly lower than its gross position, its liabilities are generally long-term in nature. The agency revealed that the negative outlook comes in the wake of the rising financial and monetary pressures, pointing out in this context to a 1 in 3 likelihood of a further rating downgrade within the next six to twelve months. In addition, the agency revealed that it could lower the ratings in the event the confidence in and stability of the currency peg worsens and in the event the government signals its intention to restructure its existing debt. From another standpoint, the agency revealed that it could affirm or raise the ratings in the event of a quick formation of a new government that will be able to implement swift reforms, easing as such deposit withdrawals and social tensions. In addition, the rating agency tied a positive rating action to the inflow of a sizeable donor support that could help in taming the fiscal pressure and bolstering the confidence in the currency peg.