Fitch Ratings, the international rating agency, downgraded on December 12, 2019 Lebanon’s long-term local and foreign currency Issuer Default Rating (IDR) from “CCC” to “CC”. However, the agency affirmed the short-term foreign and local currency IDR at “C” while lowering Lebanon’s country ceiling from “B-” to “CCC”. The agency attributed said move to the probability of a government default driven by the severe political uncertainty, de facto capital controls and the lower confidence in the banking sector that will lead to a reduction in capital inflows needed to honor financing needs.

The agency commented that the de facto capital controls and bank closures have led to halt in capital inflows, while adding that the Central Bank’s latest circular that caps interest rate on deposits would also hamper inflows. The rating agency projected foreign currency reserves, which constitute a buffer for short-term external debt payments, to drop notwithstanding the imposed capital controls, given the absence of inflows, limiting as such the government’s willingness and ability to service its debt. In figures, the rating agency projected Lebanon’s FX reserves to contract by $4 billion in 2019 to $28 billion, and to also pursue its downward trend during the year 2020 in the light of some $2.5 billion in Eurobond maturities and a compressed current account deficit of $8.5-$9.5 billion. The agency added that BDL also has some $3.5 billion in other reserves and around $13.4 billion in gold reserves.

The rating agency anticipated the economy to contract in 2019 and 2020, and a projected a budget deficit of 9.3% of GDP in 2019 along with a slim primary surplus. In this respect, the rating agency estimated that Lebanon would need to maintain a primary surplus to GDP ratio of 5% over the next four years in order to maintain its debt to GDP ratio at around 158%.

Fitch commented that the resignation of Prime Minister Hariri following the protests resulted in a renewed political paralysis, while adding that the “rationing of USD to prioritize the repayment of government” may lead to more social unrest. However, the agency revealed that a credible political resolution coupled with the formulation of an economic and fiscal rescue plan may ease financial pressures, and could in the event they were of a large magnitude restore confidence and spur economic growth. The agency also stated that none of the $11 billion in pledges by the International Support Group for Lebanon (ISGL) at the Cedre Conference in April 2018 has been disbursed yet awaiting the implementation of the agreed upon reforms, while adding that recent expressions of potential support from Saudi Arabia and the U.A.E. are yet to materialize. In addition, the agency highlighted that the aforementioned Cedre support is geared towards long-term infrastructure projects rather than budget/balance of payment support. Always in the same vein, Fitch uncovered that the ISGL held a meeting in Paris on the 11^th of December during which it reiterated its intention to support Lebanon in the event a new credible government is formed. The rating agency added that the IMF could potentially support Lebanon’s financial position yet stated that said assistance would most likely entail some debt restructuring. In figures, the rating agency estimated that Lebanon would most probably need “exceptional access” to IMF funds, as the current prevalent normal maximum of 435% of its quota, amounting to $3.9 billion, is insufficient.  

The rating agency commented that a positive rating action can be driven by better prospects for external financing, such as sizeable external support inflows or a resumption in deposit inflows to the banking system, or by the implementation of a credible fiscal and economic rescue plan that shuns debt restructuring. On the other hand, the agency stated that a negative rating action may come as a result of the emergence of imminent debt restructuring indications. It is worth noting that the rating agency did not take into consideration in its assumptions any sizeable budget/balance of payments support from GCC countries or from other donors.