Standard & Poor’s Global Ratings (S&P), the international rating agency, lowered on August 21, 2020 the issue rating of several bonds to “D” (Default) from “CC” with coupon payments due in July and August. The agency previously lowered the issue ratings from “CC” to “D” on several bonds with coupon payments that were due in May and June. The agency also affirmed the long and short-term foreign currency (FC) ratings at “SD”, and the long and short-term local currency (LC) ratings at “CC” and “C” respectively. The outlook for LC debt is still negative, portraying the likelihood that the Lebanese Government may opt to restructure its local currency debt. S&P kept Lebanon’s transfer and convertibility assessment stable at “CC”. The table below sketches all the bonds whose issue rating was lowered to “D”:

The rating agency commented that the drop in deposit inflows from non-residents has limited the Government’s ability to repay debt in 2019 thereby reducing the confidence in Lebanon’s currency peg and pressuring the foreign exchange reserves. The agency also added that the recent Beirut Port explosion has fueled social tensions and public rage leading to the resignation of the Government on August 10. S&P noted that even before the aforementioned events, the Government had made little progress in engaging creditors in debt-restructuring negotiations. In this vein, the agency expects negotiations with its creditors to be delayed beyond the year 2020 given the lack of a consensus over a comprehensive reform plan, not to mention the absence of an IMF program and the COVID-19 pandemic which also added ramifications to the already frail economic activity and to Government revenues. According to S&P, the Government has not decided to date on restructuring its local currency debt obligations standing at around 110% of GDP, yet stated that the Government would have to restructure the said debt if it where to put it on a sustainable path. The agency noted that the local currency will remain pressured in the absence of a deal with investors, and projected in this respect the Government’s debt burden to surpass 200% of GDP in 2020. In parallel, the agency mentioned that it views Lebanon’s governance and institutional effectiveness as very weak. In details, the rating agency specified that the Beirut explosion took place at a time when Lebanon was already suffering from harsh economic and financial conditions, namely a 39% year-on-year inflation in the first half of 2020, capital controls, widening disparities between the official and parallel market exchange rates, in addition to the rapidly rising unemployment and poverty levels. S&P revealed in this vein that the Beirut port explosion will negatively affect trade and food supplies, adding that the reconstruction of the damaged areas will cost billions of dollars. The agency reported that $300 million were pledged by international donors as humanitarian support following the explosion, yet added that the $11 billion pledged during the CEDRE conference depends on the implementation of policy reforms. S&P projected a 25% drop in real GDP in 2020 on the back of political uncertainty, lack of reforms to unlock external funding, continuing capital controls hindering Lebanon’s ability to import goods, and the outbreak of the coronavirus. From another perspective, the agency commented that Lebanon’s future recovery plan may be tied to fiscal reforms and reducing losses at public entities, namely the Central Bank and Electricité du Liban. The agency further commented that the reform plan is expected to include banking sector reforms, structural reforms to boost private sector investment, currency devaluation, and formalized capital controls. S&P further highlighted that roughly 10 to 15% of Lebanon’s debt ($93 billion as at end of May 2020) is held by non-residents and that the remaining portion is held by banks and by the Central Bank. The rating agency also revealed that Lebanon’s currency peg to the US dollar is fluctuating amid limited access to external financing and foreign currency deposit inflows, which led to the progressive drop in foreign currency reserves. In this vein, S&P reported that extensive restrictions on FX deposit withdrawals and transfers have resulted in the heavy depreciation of the exchange rate in the parallel market, which reached 10,000 LBP per US dollar by the end of June at one point, compared to the official exchange rate of 1,507.5 LBP per US dollar, noting that the deposit dollarization rate has reached 80% by end of June. S&P considered that the Central Bank has limited buffers to curb the deteriorating balance of payments. In figures, the agency revealed that the Central Bank held a fairly high level of gross liquid foreign reserves of around $20 billion (excluding gold, Lebanese Eurobond holdings, and foreign currency facilities provided to banks) by end of June 2020, yet commented that BDL has significant foreign exchange liabilities. The rating agency stated that it could improve the foreign currency issuer credit and issue ratings for Lebanon from “SD” and “D” following the completion of the Government’s bond restructuring plan. Finally, the agency commented that it could improve the sovereign rating if the probability of a distressed exchange of Lebanon’s local currency debt dissipates. From another standpoint, S&P stated that it could lower the local currency issuer rating to “SD” if the government signals its intention to restructure its local currency debt.