Standard & Poor’s Global Ratings (S&P), the international rating agency, affirmed on August 19, 2022 Lebanon’s long and short-term foreign currency (FC) ratings at “SD”, and the long and short-term local currency (LC) ratings at “CC” and “C” respectively. The outlook for LC debt is still negative, portraying the likelihood that the Lebanese Government may opt to restructure its local currency debt. The rating agency commented that the Lebanese government’s ratification of a debt restructuring strategy constitutes one of nine prerequisites demanded by the IMF before the IMF board considers approving the $3 billion Extended Fund Facility. In this regard, S&P pointed out that the Lebanese government has already released in May a situation update to its creditors that outlines a debt restructuring framework for some $37 billion in Eurobonds.

From another standpoint, the agency pinpointed that while currency depreciation and inflation have severely reduced the value of local currency debt to 52% of GDP as at end of year 2021, there is still a risk that said debt could be restructured. The agency commented that Lebanon’s institutional and economic profile is constrained by its political system. In addition, the agency pointed out that since October 2019, GDP per capita contracted from $8,000 in 2018 to $1,300 in 2022, with the local currency also depreciating markedly against the US Dollar, leading to a spike in inflation which averaged 155% in 2021 and is expected to remain a triple digit figure in 2022. The agency anticipated as well a 3% contraction in real GDP in 2022 on the back of a reduced consumption (due to inflation) and lower government spending, projecting a timid growth of 1.5% in 2023 amid expectations of a slight improvement in consumption and investment.

As far as the EFF prerequisites are concerned, the agency revealed that the Lebanese parliament has recently ratified the banking secrecy law, while budget and capital control laws are still being studied. Always in the same vein, the agency warned that the approval of some financial sector reforms such as the unification of exchange rates and the restructuring of the banking sector could prove more difficult. S&P added that the fragmented political landscape, as evidenced by the lack of a formation of a new government three months after the end of the elections, could also hurdle reform implementation.

S&P noted the existence of a multitude of exchange rates in the market yet highlighted that the gap between the Sayrafa rate and the black market exchange rate has significantly narrowed. In this regard, the rating agency commented that an IMF program would lead to a more flexible exchange rate, aiding in curbing the depreciation of the official exchange rate over the next two or three years to attain at a stable level of LBP 28,000 per USD by the year 2025. S&P commented that the debt to GDP ratio is very sensitive to the depreciation of the local currency, with the counter value in local currency of foreign currency debt markedly increasing to constitute 92% of total debt in 2021, up from 39% in 2019. Overall, the debt to GDP ratio is anticipated to attain 500% in 2022 up from around 160% in 2019.

On the fiscal front, Standard & Poor’s pointed out that Lebanon registered a fiscal surplus of 1.0% of GDP in 2021 (compared to a  deficit of 4.3% of GDP in 2020) mainly owing to the suspended interest payments (on Eurobonds and government securities held by BDL), lower capital spending, and collection of VAT at market rates. As far as the year 2022 is concerned, S&P estimated a smaller fiscal surplus of 0.2% of GDP in 2022, thanks to the increased assistance to public sector employees. Always in the same context, S&P projected Lebanon’s fiscal deficit to average 4.0% over the 2023-2025 period. Standard and Poor’s pointed to the continuous exodus of deposits, with non-resident deposits plummeting by 25% over the 2018 – June 2022 period to reach $126 billion.

BDL’s foreign currency reserves, according to the rating agency, have been on a downward trend over the concerned period, reaching $10.1 billion by end of July 2022, as the Central Bank did not remove all subsidies added that multilateral debt service payments are paid out of BDL’s foreign currency reserves. This leaves the Central Bank with little maneuver to slowdown the deterioration in the balance of payment, bearing in mind that the Central Bank needs parliamentary approval to tamper some $16 billion in gold reserves according to S&P. In this regard, the agency foresees a sizeable contraction in the current account deficit to $2.1 billion in 2022, from an estimated deficit of $3.3 billion in 2021 and a deficit of $11.5 billion in 2019, as a result of reduced demand and large foreign currency shortages.

On the financial sector front, S&P expects the audit of the 14 largest banks to kick-in in the upcoming few months, while noting that some banks have already resorted to liquidating assets in foreign countries such as Egypt and Cyprus to deal with the liquidity crunch. Finally, the rating agency projects inflation to fall to the two-digit mark and to maintain a downward pace over the 2023-2025 period. S&P stated that it could improve the foreign currency issuer credit and issue ratings for Lebanon from “SD” and “D” following the completion of the Government’s bond restructuring plan. Finally, the agency commented that it could improve the sovereign rating if the probability of a distressed exchange of Lebanon’s local currency debt dissipates.

From another standpoint, S&P stated that it could lower the local currency issuer rating to “SD” if the government signals its intention to restructure its local currency debt.