Moody’s Investors Service, the international rating agency, issued on May 18, 2020 a rating update on Lebanon in which it maintained the country’s issuer ratings at “Ca” and its outlook at “Stable”. This rating profile showcases Lebanon’s unstable debt trajectory and the likelihood that the government’s creditors will suffer substantial losses as outlined by the government’s debt restructuring plan. The “Stable” outlook, on the other hand, balances between the possibility of a coordinated debt restructuring with creditors along with the successful implementation of an agreed upon economic adjustment program with the IMF that secures external funding and the possibility of the absence of such funding given government’s poor track record in policy implementation.

The rating action by Moody’s takes into consideration four major elements, namely, economic strength, institutional strength, fiscal strength, and susceptibility to event risk. Lebanon scored “b2” in economic strength given its small size, frail growth prospects, and weak competitiveness, which are partly counterbalanced by comparatively high wealth levels. Moody’s highlighted that the inflow of remittances and Foreign Direct Investments (FDIs) to the country has been hampered as a consequence of the regional tensions since the year 2011, with tourism activity declining, trading routes across Syria closed and oil prices dropping, reflecting as such negatively on GDP growth. On the institutional strength front, Lebanon attained a score of “caa1”, reflecting a weak government effectiveness, high corruption levels, inflexible spending structure and the diminishing capacity of BDL to implement its monetary policy of funding the government and maintaining the peg. With respect to fiscal strength, the former was assessed as “ca” portraying the large debt burden and high debt servicing cost (at 50% of revenues, the highest amongst rated countries). Lastly, Lebanon scored “ca” in susceptibility to event risk given the government’s diminishing funding sources (whether local or international), the weakened confidence in the sustainability of the peg and the high levels of geopolitical risk.

Finally, the agency commented that it would mull upgrading the outlook in the event the risk of large losses for the government’s creditors abate. This could be achieved in case the government succeeds in registering successive primary surpluses, implementing reform in the electricity sector, and taming the public sector wage bill. On the other hand, the rating agency pointed out that a rating downgrade could come as a result of the suspension of external funding as a result of the inability of the government to implement economic and fiscal reforms, magnifying accordingly the potential losses to creditors.