Moody’s Investors Service, the international rating agency, published on July 12, 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 since the end of the previous presidential term on October 31, 2022, and has also failed in forming a new government following the parliamentary elections that took place in May 2022. The report added that the term of the current Central Bank governor will end in July, and yet no new governor has been appointed. Moody’s also commented on the recent IMF Article IV report which outlined that the Lebanese economy has contracted by 40% since 2018, with the local currency losing 98% of its value and inflation hitting three-digit levels. Moody’s also added that the IMF report suggested a reform scenario that would see the debt-to-GDP ratio contract from over 200% at present to 80% by the year 2027.

From another standpoint, it is worth clarifying that a rating by the agency takes into consideration four major elements, namely, economic strength, institutional and governance strength, fiscal strength, and susceptibility to event risk. Lebanon scored “caa2” in economic strength given the steep economic contraction as well as deteriorating income levels which pushed 80% and 36% of the population to below the poverty and extreme poverty lines on a respective basis, while pointing out on a positive note that remittances are aiding in supporting income levels. The score also showcases 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 (estimated at 25% of the population). On the institutional and governance strength front, Lebanon attained a score of “ca”, 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. 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.