Moody’s Investors Service, the international rating agency, published on July 22, 2021 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 beginning of a harsh economic, fiscal & social crisis, a severely weak institutional & governance strength (thereby impeding reform implementation), 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 government’s highly leveraged balance sheet that could result in large losses for creditors in the event of default. 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 and the transition to a sustainable growth model. 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 Lebanese crisis has worsened owing to hyperinflation stemming from the large exchange rate pressures, with the black market exchange rate surpassing the LBP 19,000 per USD mark in mid-July in addition to the sizeable & more frequent water, electricity, and food shortages. In this respect, the agency stated that the inflation rate reached a peak of 154% year-on-year in the first quarter of 2021, noting that it had reached an annual average of 85% in 2020 (in comparison with 2.9% in 2019). In addition, the report mentioned that the country’s high reliance on imports for consumption (including the highly subsidized basic food items) coupled with limited capital inflows, have led to the fast drop in FX reserves to $15.7 billion as at end of May 2021 from $26.4 billion in the same period in 2020. In this vein, Moody’s stated that funding costly essential items subsidies (wheat, fuel, and medicine) has become highly difficult. Furthermore, the agency commented that protests have become more frequent and severe all over the country, noting that more than half of the Lebanese population is estimated to have fallen below the national poverty line according to the World Bank. The rating agency added that it has been almost one year since the resignation of Mr. Hassan Diab’s government following the Beirut port explosion. Furthermore, Moody’s commented that the withdrawal of Prime Minister Designate Mr. Saad Hariri following 8 months of negations for a new government highlights the nearly impregnable political deadlock prevailing in the country. In a related note, the report noted that the European Union has been spearheading the international community’s efforts to pressure political leaders to form a government and enact reforms while simultaneously threatening to impose sanctions in the event no progress is made by the end of July 2021. Finally, the report stated that external financial support hinges on the next government’s implementation of structural reforms which will be viewed as a stepping stone towards initiating discussions for a comprehensive debt restructuring plan, most likely under an IMF program.