Moody’s Investors Service, the international rating agency, published on January 23, 2023 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. The rating agency, however, does not foresee any upgrade over the near future.

According to the report, the Lebanese Parliament has not been able to elect a new President after 11 trials as of January 19. Similarly, Moody’s stated that the Parliament has been unsuccessful in forming a new government following the parliamentary elections that took place in May 2022. In this vein, the report commented that the ongoing political deadlock is the main reason behind the Lebanese political establishment’s inability to meet the IMF reforms requirements, namely restoring the solvency of public finances and the banking system, legitimizing capital controls, eliminating the multiple exchange rates, and conducting comprehensive BDL and state-owned enterprises’ audits. From another perspective, the report noted that the Lebanese Pound continued its devaluation against the US Dollar, whereby the USD exceeded the LBP 50,000 mark in the parallel market as of January 22. Moody’s also shed light on BDL’s amendment of BDL circular 151 allowing depositors to withdraw their foreign currency deposits at LBP 15,000 per USD instead of LBP 8,000 per USD with a monthly ceiling of $1,600. Said action comes in light of the Central Bank’s objective to unify exchange rates in accordance with the IMF’s conditions to unlock external funding. Yet the rating agency commented that the alteration of the official exchange rate will “crystallize” valuation losses on the books of financial institutions and the Central Bank, thereby incentivizing policy makers to implement said shift with regards to a debt restructuring and a reform program with the support of external financing.

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. The score also takes into account Lebanon’s default on its Eurobond payments. 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.