Fitch Ratings, the international rating agency, affirmed on August 20, 2020 Lebanon’s long-term foreign currency Issuer Default Rating (IDR) at “RD” (Restricted Default), the short-term foreign and local currency IDR at “C”, the long-term local currency IDR at “CC” and the country ceiling at “CCC”. The agency attributed the “RD” rating to Lebanon’s failure to honor its March 9 Eurobond payment. The agency added that the government also ceased paying its outstanding Eurobond stock awaiting a restructuring agreement, and that the government is still “servicing” its local currency obligations. Fitch added that limited progress has been achieved so far on the Financial Recovery Plan (FRP) that was set forth by the government in April mainly on the back of the disagreement between the government and the financial sector over the magnitude of the latter’s losses. In this regard, Fitch quoted the plan’s estimated financial sector (BDL and banks) losses of around LBP 154 trillion, stating that the latter refuted said figure and proposed an alternative plan. Fitch commented that Lebanon would now require the formation of a new government after the resignation of the latest government in order to strike a deal with the International Monetary Fund (IMF), and that proceeding with a recovery plan hinges upon achieving some sort of consensus between the country’s political and economic elites. In this vein, the agency indicated that it remains unclear how long the government formation process would take and that the IMF would likely insist on the achievement of some tangible progress on the reform front before agreeing to a funding program with the country. In this regard, key reforms suggested by the IMF include addressing public finances and promoting debt sustainability, passing legislation to implement capital controls and trimming the losses of state enterprises. Fitch detailed that the government’s FRP aims at reducing the debt to GDP ratio from 176% in 2019 to less than 90% in 2026, and that the plan assumes an exchange rate of LBP 3,500 per U.S. Dollar. Always in the same vein, the agency commented that whilst the plan does not explicitly indicate the magnitude of the haircuts on external and local debt, it estimates said haircuts to stand at 70% and 43% respectively. Fitch commented that the already worsening macroeconomic conditions, multiple exchange rates, skyrocketing (90%) inflation and deteriorating GDP, have been aggravated by the recent Beirut Port blast. In this regard, the agency forecasted real GDP to contract by 25% and nominal GDP to decline from $55 billion in 2019 to a 15-year low of $20 billion in 2020. 

Finally, the rating agency announced that a positive sovereign rating action would occur in the event the government concludes a restructuring arrangement with its creditors and completes the restructuring process. On the other hand, Fitch announced that it would downgrade Lebanon’s long-term local currency IDR to “C” in case a restructuring plan emerges for local currency debt or directly to “RD” if a default occurs on the local currency debt before any restructuring announcement.