Moody’s Investors Service, the international rating agency, published on December 18, 2023 a regular rating update on the Government of Lebanon following the outlook change to stable. Moody’s maintained 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 the stable outlook indicates that Lebanon’s rating is likely to remain unchanged given the high likelihood of large losses for private creditors and the unstable economic environment amid the political stalemate and feeble institutions. The agency also mentioned that the country’s rating is unlikely to change unless 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, should the conflict in Gaza escalate, the effects would be dire for Lebanon. Moody’s stated in this respect that it expects the recovery of the tourism sector (which accounts for 15-20% of Lebanon’s GDP) to be dented by the regional conflict, thereby worsening the country’s current FX shortages, the pressures on the LBP to USD exchange rate and sparking inflation hikes. The report also noted that progress with regards to debt restructuring will be contingent upon the government’s capacity to implement reforms. The report stated, however, that the Lebanese Parliament has failed 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. Similarly, the report added that the Central Bank of Lebanon is being led by the acting Governor Dr. Wassim Mansoury following the end of the prior Governor’s (Mr. Riad Salameh) term in July 2023.

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. 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.