Moody’s Investors Service, the international rating agency, published on November 29, 2021 its annual credit analysis of the Government of Lebanon, maintaining the country’s rating at “C”, in the light of the panoply of economic, social and financial crises ravaging the country. The rating agency considered that while inking an IMF program may be vital, it remains challenging in the light of the upcoming parliamentary elections. In this regard, Moody’s pointed out that international financial institutions are willing to extend financial support to Lebanon during the debt restructuring process, conditional on the implementation of reforms. Said reforms center around restoring the solvency of public finances and the banking sector through debt restructuring, ratifying legislation related to capital controls and the elimination of multiple exchange rates, and conducting an inclusive audit of the Central Bank and state-owned enterprises (SOEs). It is worth noting that the rating agency also decided not to assign an outlook for Lebanon, given the high probability of sizeable losses to Lebanon’s bondholders added the fact that Lebanon’s “C” rating is already the lowest on its rating scale. In the same vein, Moody’s expects losses to creditors to exceed 65% as a result of Lebanon’s default. The rating agency added that it does not foresee any upward movement in Lebanon’s rating before the debt restructuring process, and that even after restructuring an improvement in the rating would be limited for some time.  Always in the same regard, Moody’s stated that it may consider a rating upgrade above current levels in the event drivers evolve to ensure future debt sustainability, with said drivers including registering economic growth, securing access to funding and ensuring sustainable 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, 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 capital outflows, 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. In figures, Moody’s pointed out that Lebanon’s GDP contracted from $55 billion in 2018 to below the $20 billion level in 2020, while the multidimensional poverty rate doubled from 42% in 2019 to 82% in 2021. The report added that the circa 90% depreciation of the local currency in the parallel market has fueled inflation to around 145%, whilst in parallel curbing imports. On the other hand, Moody’s pointed out that the formation of the government is a first step only towards the implementation of reforms and public debt restructuring, while pointing out that the forensic audit of BDL has been resumed. 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 high deterioration in the government’s debt to GDP ratio. In figures, Moody’s expects the country’s debt-to-GDP ratio to surpass the 200% mark in the year 2021 and to remain quite high over the upcoming years in the absence of any debt restructuring (ranging between 140% and 170% in 2023). In this regard, the agency pointed out that the rise in the debt-to-GDP ratio takes into account the devaluation of the local currency, highlighting the increase in share of foreign currency debt as a percentage of GDP as a result of the drop in GDP at current prices. The agency noted as well that its projections assume a slower depreciation of the currency in comparison with the black market. Had market rates been adopted, Moody’s estimated the debt to GDP ratio to have stood at 300% in 2020 and at 250% in 2021. Lastly, Lebanon scored “ca” in susceptibility to event risk driven by the country’s government liquidity risk and external vulnerability risk. In this regard, the agency referred to the recent rift between Lebanon and GCC countries, which drove said countries to severing diplomatic ties and banning Lebanese imports, in addition to possibly reducing their pledges as donors. The agency assigned a “caa” rating to the banking sector when taking its large size into account which exceeded four times GDP before the government default, while noting that notwithstanding the de-facto capital control that was informally imposed since late 2019, some $5.4 billion in foreign currency non-resident deposits exited the banking system over the January 2020 – September 2021 period, with this figure rising to $9.5 billion when factoring in the year 2019. Always on the susceptibility to event risk front, the agency commented that liquidity risk is high given the fact that imports are drying up foreign currency reserves. On the other hand, the rating agency pointed to the resilience of remittances from abroad in the year 2020, which ultimately helped in tightening the current account deficit bearing in mind that said year witnessed a sharp contraction in tourism revenues.