Moody’s Investors Service, the international rating agency, published this week its annual credit analysis on the Government of Lebanon, maintaining the country’s rating at “C” with no outlook. The agency justified its decision not to assign an outlook with the high potential losses for private creditors added the fact that Lebanon’s rating is the lowest on the rating scale. The agency added that any upward movement to Lebanon’s rating would be limited over the short-term, while tying such action to the restructuring of the debt. In addition, the agency commented that in order for Lebanon’s rating to reflect a lower probability of significant losses for bondholders, Lebanon must achieve debt sustainability by restoring economic growth, generating privatization revenues and recording sustainable large primary surpluses. 

From another standpoint, it is worth clarifying that a rating by the agency takes into consideration four major elements, namely, economic strength, institutional strength, fiscal strength, and susceptibility to event risk. Lebanon scored “b3” in economic strength given its small size, weak growth prospects, and frail competitiveness, with the agency indicating that Lebanon’s traditionally high wealth levels will be eroded by the shift towards a new and sustainable growth model. Moody’s highlighted that the continuous inflow of remittances to the country in the past has traditionally driven the real estate and services sectors. Moreover, and as per the agency, Lebanon’s competitiveness and growth capabilities have deteriorated since the outbreak of the Arab Spring revolutions in 2011 which resulted in a significant slowdown in tourism activity, a substantial decline in trade activity, and imposed a huge additional burden on the country by the massive influx of Syrian refugees. The report indicated that economic conditions have deteriorated sharply in recent times, citing the depreciation of the local currency (>80%) in the parallel market, the sky-rocketing inflation rates (>110% y-o-y) and the rising unemployment levels. The rating agency commented, however, that the CEDRE conference will channel investments to the electricity, transport and solid waste sectors, bearing in mind that such investments are conditional on the implementation of reforms. In addition, Moody’s pointed out that the IMF has reiterated its commitment to support Lebanon in the wake of the Beirut Port blast (which resulted in economic losses of around $8 billion) once reforms are implemented. Always on the reform front, the report cited the signing of contracts with Alvarez & Marsal, KPMG and Oliver Wyman to conduct an audit of BDL. On the institutional strength front, Lebanon attained a score of “caa3”, reflecting a frail governance environment characterized by an anemic fiscal and monetary policy effectiveness. Always in this vein, the report indicated that Lebanon performed very poorly in terms of corruption and political stability in comparison to other countries. With respect to fiscal strength, the former was assessed as “ca”, with the agency expecting the debt-to-GDP ratio to exceed the 200% mark in 2020, assuming an official exchange rate of LBP 3,500 per USD as portrayed by the government’s economic reform plan, while also anticipating the interest payments to government revenues ratio to surpass the 60% level. Always in the same vein, the report pointed out that the government’s economic reform plan has failed to get the nod from several parties, including the Central Bank of Lebanon and the banking sector. Moody’s also commented that achieving debt sustainability would imply that losses for bondholders would stand at around 65%. Lastly, Lebanon scored “ca” in susceptibility to event risk given its high exposure to domestic and geopolitical risks, while stating that the Central Bank’s net foreign assets are shrinking notwithstanding the drop in the trade deficit.