Moody’s Investors Service, the international rating agency, published this week a regular rating update of the Government of Lebanon, maintaining the country’s rating at “C”, citing a set of credit strengths and challenges underlying Lebanon’s rating. The credit strength Moody’s highlighted is the commitment for international donor support dependent on the implementation of the IMF reform program. On the other hand, credit challenges included the rising exposure to a harsh economic, fiscal & social crisis, a severely weak institutional & governance strength (thereby delaying external support), and a continued drawdown of foreign exchange reserves (instigating a large currency depreciation in the parallel market & a rise in inflation levels).

In parallel, Moody’s stated that it may consider a rating upgrade in the event that fiscal consolidation and structural reform implementation are undertaken at a much faster pace than current levels and over a number of years on the one hand, and a sizeable improvement in the country’s key debt dynamics (such as economic growth, interest rates, privatization revenues, and capacity to register large primary surpluses) on the other so as to guarantee debt sustainability in the future.

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, showcasing the very large economic adjustment costs to transition toward a new and more sustainable growth model. Moreover, 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. On the institutional strength front, Lebanon attained a score of “caa3”, reflecting a frail governance environment characterized by an anemic fiscal policy effectiveness, coupled with a heavily constrained monetary & fiscal policy effectiveness taking into account the economic & external pressures. With respect to fiscal strength, the former was assessed as “ca”, a fact that portrays the large debt burden surpassing the 200% of GDP mark in 2020 (assuming an adjustment to the official currency peg to LBP 3,500 per USD as per the government’s reform plan). According to Moody’s, the debt trajectory remains highly sensitive to adverse growth, inflation & foreign-exchange dynamics, thereby highlighting the possibility for additional loss accumulation in the absence of a restructuring agreement with the support of the International Monetary Fund. Lastly, Lebanon scored “ca” in susceptibility to event risk driven by the country’s government liquidity risk and external vulnerability risk.

Moody’s also noted that the deteriorating economic conditions are fueling social risks, as evidenced by the sharp increase in poverty rates to 45% in 2020 (up from 37% in 2019 and 25.6% in 2012) and extreme poverty rates to 22% (up from 16.2% in 2019 and 10% in 2012 according to the World Bank). In addition, the report mentioned that the continued drawdown of FX reserves is undermining the viability of subsidized key imports and the currency peg, as evidenced by the drop in FX reserves to $19 billion as at end of November 2020 (down from $36.8 billion in October 2017), of which $16.7 billion are mandatory reserves on customer deposits at banks and the remaining $2.3 billion allocated for key imports such as wheat, fuel and medicine at subsidized rates (expected to last for an additional six months). Furthermore, the report stated that the slow progress in the formation of a new government is delaying any external financial support to the country. More specifically, Moody’s commented that Mr. Saad Hariri was mandated to form a new government on October 22 following the resignation of Mr. Hassan Diab’s government on August 10 after the Beirut port explosion. To date, Prime Minister Saad Hariri has been unable to form a government as a result of the disagreements between the different political factions. On a final note, the report cited the necessary reforms needed to make public finances and the banking system solvent once more which included a comprehensive debt restructuring, the instigation of a capital control law, the elimination of multiple exchange rates, and comprehensive audits of the Central Bank and state-owned enterprises, among others.