Moody’s Investors Service, the international rating agency, published on June 13, 2022 a regular rating update on the Government of Lebanon, maintaining the country’s rating at “C”, a rating which reflects that losses for bondholders are likely to exceed 65%, citing a set of credit strengths and challenges underlying Lebanon’s rating. The credit strength Moody’s highlighted is the commitment of international donor support dependent on the implementation of the IMF reform program. On the other hand, credit challenges included the propagation of a harsh economic, fiscal & social crisis, a severely weak institutional & governance strength (thereby impeding reform implementation), and the erosion of purchasing power parity via the dramatic depreciation of the pound and spiking inflation levels.

In parallel, Moody’s stated that it may consider a rating upgrade in the event 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 liquidity risk & external vulnerability risk, added the high exposure of the banking sector to sovereign debt.

As far as recent developments are concerned, Moody’s pointed out that the results of the recent parliamentary elections will make it difficult to form a government and for any party to obtain a sizeable majority in the government, hindering as such the ability of any new government to implement economic and financial reforms that are considered prerequisite to the release of support from the IMF and other donors. From another perspective, the report noted that the consumer price index soared by 207% annually as at end of April 2022, with the US Dollar in the parallel exchange market appreciating by 115% against the Lebanese Pound in May to around LBP 27,600 (up from LBP 12,854 per USD a year earlier). Finally, Moody’s revealed that the increase in fuel & food prices stemming from the Russian invasion of Ukraine are driving poverty levels higher and aggravating the economic crisis.