Standard & Poor’s Global Ratings (S&P), the international rating agency, affirmed on August 18, 2023 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 mentioned that the Lebanese government is only paying back the principal portion of the local currency debt held by the Central Bank while it has frozen coupon payments since 2021. The agency commented in this respect that it does not consider the freezing of interest payment to the Central Bank as a default event.

From another perspective, the rating agency also commented that Lebanon needs to implement the reforms pledged to the IMF staff-level agreement on April 7, 2022 prior to obtaining a board approval. Some of these reforms include receiving cabinet approval for a banking sector restructuring plan & a medium-term fiscal and debt restructuring strategy, completing the audit of the Central Bank’s foreign assets’ position, instigating an external evaluation of the largest 14 banks, and unifying the exchange rates, only to name a few. The agency noted, however, that reforms implementation remain constrained amid the frail political environment, the limited capacity of the caretaker government to enact legislation, and the delays in appointing a new president and a new governor for the Central Bank. Concerning the restructuring of the banking sector, the rating agency mentioned that the exercise remains challenging given the lack of consensus among stakeholders on the nature and size of the losses and how the losses are to be allocated. In addition, the agency stated that the audit of the Central Bank and the parliamentary approval of the year 2022 budget were completed the previous year. In parallel, S&P noted that the capital control & banking secrecy laws failed to meet IMF requirements and would be unable to support the rehabilitation of the sector effectively. Conversely, the agency stated that the adjustment of the official exchange rate still does not satisfy the IMF’s precondition to unify the exchange rates. S&P also revealed that it opted to adopt the Sayrafa rate for the calculation of economic & fiscal figures as the official exchange rate is infrequently adopted in transactions and has accordingly adjusted its forecasts of fiscal flows over the 2023-2026 period.

From another standpoint, the agency noted that the caretaker government is unlikely to enact the necessary reforms to meet the IMF’s preconditions until a new president is elected. In addition, Lebanon was also negatively affected by the delay in appointing a new Central Bank governor and in the absence of a candidate, the first deputy governor Mr. Wassim Mansouri has been appointed as the acting governor of the Central Bank. S&P also revealed that the acting governor has called for the adoption of a capital control law and the proposed 2023 budget (which was presented to the Council of Ministers in July 2023) and the “liberalization” & unification of the exchange rate, which altogether align with the IMF’s prerequisites to unlock the agreed-upon funding. According to the rating agency, the Lebanese authorities have so far failed to decide on the allocation of banking sector losses stemming from the sovereign debt restructuring & the sizeable devaluation of the Lebanese Pound against the US Dollar, thereby postponing economic recovery. In addition, the agency noted that the macroeconomic crisis has markedly reduced the size of the Lebanese economy from $53 billion in 2017 to an estimated $16 billion in 2022. Furthermore, the agency estimated GDP per capita to sharply drop from around $7,800 in 2017 to circa $2,000 in 2023. S&P also estimated real GDP growth at 0.3% in 2023, in comparison with economic contractions of 1.5% in 2022 and 7.0% in 2021. The agency noted in this regard that the modest recovery in private-sector activity and the rise in tourism will support moderate growth in the 2023-2026 period.

From another perspective, the rating agency mentioned that the official exchange rate was revisited on February 1, 2023 from LBP 1,507.5 per USD to LBP 15,000 per USD and accordingly, and in an effort to tame the unprecedented depreciation of the Pound in the parallel market that started in March, the Central Bank has decided to sell unlimited amounts of US Dollars at the Sayrafa rate of LBP 90,000 per USD which has reduced the gap between the Sayrafa exchange rate and the parallel market rate. In this vein, the agency projected the exchange rate to stabilize at around LBP 91,000 per USD by end of year 2023, before reaching circa LBP 102,000 per USD by end of year 2026, noting that these estimations are subject to high levels of uncertainty.

On the fiscal front, S&P pointed out that the 2023 budget law centers upon a fiscal deficit of LBP 34.1 trillion and once approved, the budget will be sent to the parliament for ratification. In addition, the agency noted that the Lebanese government is currently preparing the 2024 budget which will reflect fiscal accounts at the market rate. In this regard, the agency estimated fiscal deficit at 0.3% of GDP in 2023, a figure that is likely to increase steadily to 1% in 2026 as fiscal funding constraints gradually decrease over the coming years and revenue collections at market rates become more efficient. Overall, the debt to GDP ratio is expected to reach 334% in 2023, up from around 160% in 2019. In a related note, S&P revealed that the foreign currency debt portion constituted circa 40% of total debt in 2019 and has estimated said portion to have increased to more than 90% in 2023 when translating the local currency debt at the Sayrafa rate. Standard and Poor’s commented that in the absence of genuine progress on restructuring and reforms, investor & depositor confidence has faded away and customer deposits at banks have sustained their downturn, resulting in an increase in the deposit dollarization rate to over 90%. Similarly, the devaluation of the official exchange rate has also resulted in a rise in the loan dollarization rate to circa 90% in 2023. S&P also pointed to the continuous exodus of deposits, with non-resident deposits plummeting by 40% over the 2017 – June 2023 period to reach $24.7 billion.

From another standpoint, the agency stated that the persistent deposit outflows, coupled with the multilateral loan payments, together with Central Bank’s interventions via the Sayrafa platform and the accumulated losses thereof have led to a colossal drop in FX reserves (including gold and excluding Eurobond holdings) at BDL from $52 billion at end of 2017 to $26.7 billion at end of July 2023. In this respect, S&P estimated FX reserves (including gold) to extend their downward trend to reach circa $19 billion at end of 2026 as a result of the current account deficit financing and state funding. In a related note, the rating agency noted that BDL holds around $18 billion in gold reserves yet is unable to use them without parliamentary legislation. In this regard, the agency foresees contractions of $1.7 billion in the current account deficit over the 2023-2026 period mainly owing to lower imports driven by foreign currency shortages, and strong net remittance inflows. The agency also noted that in the absence of external funding, it expects constrained current account deficits and does not expect the Central Bank to continue funding the current account deficit from its FX reserves. In addition, the agency commented that the devaluation of the Pound and the gradual lifting of subsidies has pushed inflation levels to around 171% in 2022, with the CPI growth averaging 230% in the first half of 2023. S&P expects the shortage of FX and the high cost of imports to keep inflation in the triple-digit levels during the years 2023 and 2024.

The agency stated that it could improve the foreign currency issuer credit and issue ratings for Lebanon from “SD” 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 or if the government fails to pay local currency principal or interest payments on time.