Moody’s Investors Service, the international rating agency, downgraded on July 27, 2020 Lebanon’s issuer ratings from “Ca” to “C”. In addition, the agency refrained from assigning an outlook to the rating due to the high probability of private creditors incurring large losses and to the fact that a “C” rating is the lowest possible rating assigned by Moody’s. This rating action showcases Moody’s assessment that the losses incurred by bondholders following the Government’s default on the payments of Eurobonds are likely to surpass 65%. The agency also took the following rating actions: It downgraded Lebanon’s senior unsecured Medium Term Note Program rating from “(P)Ca” to “(P)C”, affirmed the other short-term rating at “(P)NP”, kept the long-term foreign currency bond ceilings unchanged at “Ca”, lowered the long-term foreign currency deposit ceiling from “Ca” to “C”, lowered the long-term local currency bond and deposit ceiling from “Caa1” to “Caa2”, and maintained the short-term foreign currency and deposit ceilings at “Not Prime”.

In details, Moody’s noted that Lebanon is suffering from a harsh economic, financial and social crisis, in addition to the devaluation of its local currency in the parallel market, and an unprecedented hike in inflation and unemployment levels. In addition, the rating agency mentioned that the recurring delays in implementing crucial fiscal and economic policy reforms have hampered discussions with the IMF and with other international official donors. More particularly, Moody’s commented that very little progress was achieved in necessary prerequisites, such as a forensic audit of the Central Bank of Lebanon, the adoption of capital control laws, and a consensus among domestic stakeholders on the Government’s debt restructuring and reform plan. The agency also mentioned that the limited fiscal & monetary policy implementation capacity and the diminished governance performance particularly related to corruption reduce the likelihood of shifting to a new and more sustainable growth model after implementing the debt restructuring plan. The agency commented that a weak fiscal discipline reduces the Government’s ability to carry debt in the long-term and thereby implies a larger debt write-off or a higher probability of future re-default if debt relief proves insufficient to restore long-term debt sustainability. Moody’s projects a double-digit economic contraction in 2020 on the back of the near 80% devaluation of the local currency in the parallel market, which in turn has limited imports activity and led to a surge in inflation to nearly 90% year-on-year as of June 2020. Moody’s estimates Lebanon’s debt to GDP ratio to reach 200% in 2020 propelled by the devaluation of the local currency to a new official exchange rate level of 3,500 LBP per US dollar as outlined in the Government’s reform plan. According to Moody’s estimates, the debt trajectory is largely affected by adverse growth and foreign exchange dynamics, increasing the likelihood of additional loss accumulation in the absence of a bailout plan with the IMF. In this vein, the agency highlighted that accessing previously pledged international investment support hinges on implementing an IMF reform program.

The agency stated that any upgrades in the rating following the debt restructuring would need a long time to materialize, noting in this respect that the fiscal consolidation and/or structural reform implementation needs to be conducted at a faster pace over several years. Another precondition that could lead to a solid rating upgrade and that would lead to debt sustainability in the future is the improvement in key drivers of Lebanon’s debt dynamics, namely economic growth, interest rates, privatization revenue, and the ability to generate large primary surpluses.