Fitch Ratings, the international rating agency, affirmed on August 4, 2023 Lebanon’s long-term foreign currency Issuer Default Rating (IDR) at “RD” (Restricted Default) and the short-term foreign currency IDR at “C”, while it downgraded the long-term local currency IDR from “CC” to “RD” and the short-term local currency IDR from “C” to “RD”. In parallel, Lebanon’s country ceiling was upgraded from “CCC” to “CCC+”, reflecting Fitch’s revised Country Ceiling Criteria published in July 2023. The agency attributed the “RD” rating on Lebanon’s long-term foreign currency to the country’s failure to honor its March 9, 2020 Eurobond payment. The agency added that the government also ceased paying its outstanding Eurobond stock awaiting a restructuring agreement. In addition, the downgrades made by Fitch on Lebanon’s long-term and short-term local-currency IDRs reflect the fact that the government is not paying interest on BDL’s holdings of government securities denominated in local currency. More specifically, the agency noted that it considers the government’s prolonged compiling of arrears to BDL as a default event. On the same note, Fitch stated that the Lebanese authorities have not requested a restructuring of local-currency debt. From another perspective, the rating agency mentioned that the IMF and Lebanon have reached a staff-level agreement in April 2022 for a four-year Extended Fund Arrangement of around $3 billion in support of a comprehensive economic & financial reform program. According to Fitch, the IMF has identified 10 actions that need to be addressed before obtaining a board approval, noting that Lebanon has so far only completed 4 actions. Furthermore, the agency revealed that an amended bank secrecy law was adopted by the Lebanese parliament yet noted that it did not meet the IMF’s requirements. The agency also revealed that a special audit of the Central Bank’s net international reserves was completed and is expected to be published shortly. In this vein, Fitch noted that there are several prior actions required by the IMF, namely a parliamentary approval of emergency bank resolution legislation, a case-by-case assessment of banks, and the unification of exchange rates, only to name a few. In this regard, the agency commented that the political divide has thwarted reform implementation, with the Lebanese parliament proving unable to elect a new President since the end of the former President’s term in October 2022 and the government being stuck in a caretaker capacity since the parliamentary elections in May 2022. From another perspective, the rating agency revealed that despite the informal capital control and deposit withdrawal restriction measures placed, foreign currency reserves at BDL continued to dwindle, dropping from around $11.8 billion in May 2022 to around $9.7 billion in May 2023, thereby exacerbating the negative foreign-currency position at BDL and its ensuing effects on banks and depositors. In addition, Fitch noted that banks’ foreign-currency liabilities stood at $97 billion in May 2023 while their foreign-currency assets at BDL amounted to around $79 billion but are “not available to them” given that BDL’s gross liquid foreign currency reserves stood at a mere $9.7 billion as of May 2023 (excluding gold reserves and BDL holdings of Lebanese government Eurobonds). The rating agency commented that the Lira has lost 99% of its value between early 2019 and March 2023 before somewhat stabilizing at LBP 95,000 per USD since April 2023 shortly after the Central Bank announced that it will intervene in an unlimited fashion to stabilize the exchange rate on the Sayrafa platform at LBP 90,000 per USD. Fitch noted, however, that the unlimited intervention of BDL in the parallel market is unlikely to continue as this would drain foreign currency reserves. In a related note, the agency mentioned that BDL’s “quasi-fiscal operations and monetization” of the country’s fiscal deficit have more than doubled currency in circulation since June 2022 which, in its turn, has propelled inflation levels to 262%
y-o-y in June 2023. According to Fitch, the IMF estimated GDP to have contracted by 10% in 2021 and to have remained stagnant in 2022, while estimating an economic contraction of 0.5% in 2023. In this vein, Fitch noted that the economic situation in Lebanon starting 2024 and onwards hinges on the implementation of reforms and debt restructuring, awaiting the election of a new President and the appointment of a new cabinet. In addition, the rating agency noted that the elevated inflation levels have decreased the country’s debt-to-GDP ratio from 350% in 2021 to 282% in 2022 according to the IMF despite the depreciation of the Lira against the US Dollar. Furthermore, the IMF estimated the debt-to-GDP ratio to attain 509% in 2023 and to hover between 450% and 550% in the medium-term amid the absence of reforms and restructuring, noting that it estimated a gradual drop in the debt-to-GDP ratio to 80% in 2027 should a restructuring take place in 2024 and should Lebanon conform to the IMF program. From another standpoint, the agency revealed that the current account deficit widened from 14% of GDP in 2021 to 31% of GDP in 2022 as a result of a higher import bill and low exports of goods even though tourism has recovered during the concerned year. In addition, Fitch estimated the current account deficit to somewhat narrow to 24% of GDP in 2023 amid a partial funding by remittances. Finally, the rating agency announced that a positive sovereign rating action would occur in the event the government concludes a restructuring arrangement with its creditors and completes the debt restructuring process. In addition, the long-term and short-term local-currency IDRs could be upgraded if Lebanon resumes interest payments on BDL’s holdings of local-currency debt and carries on servicing local-currency debt to other creditors.