Standard & Poor’s Global Ratings (S&P), the international rating agency, affirmed on February 16, 2024 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 reforms’ implementation that could prompt economic recovery continue to stall amid the continued political bickering. The agency also stated that presidential elections have not yet been concluded even after the 12 electoral sessions that were held in the Lebanese parliament. In addition, the agency revealed that the caretaker government’s ability to implement the necessary reforms required by the IMF program is limited, commenting that a debt restructuring exercise is unlikely to take place. Furthermore, S&P noted that the war in Gaza, which has raised political tensions and amplified domestic security risks, has exacerbated the challenges that Lebanon is facing since more than four years.

From another standpoint, S&P mentioned that the acting BDL governor is urging the Lebanese parliament to pass a temporary capital control law in addition to the liberalization & unification of the exchange rate and a legal framework that will forbid the Central Bank’s financing of the government, which are all reforms that align with the preconditions set by the IMF program. It is also worth mentioning that Lebanon reached a staff-level agreement with the IMF in April 2022 to unlock some $3 billion in financial aid to the country over a period of 46 months conditional upon the implementation of reforms the purpose of which is to rebuild the economy and improve governance. Some of these reforms include obtaining 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, among others. 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. The agency noted, however, that the amendments made to the banking secrecy law and the numerous reviews of the capital control law require more changes to successfully support financial sector 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 2023. Furthermore, the agency estimated GDP per capita to sharply drop from around $7,800 in 2017 to circa $3,000 in 2024. S&P also estimated GDP to contract by 0.2% in 2024, in comparison with economic contractions of 0.2% in 2023 and 0.6% in 2022. 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 2025-2027 period. On the fiscal front, S&P pointed out that the 2024 budget, which was approved in January, did not present key reforms such as those required by the IMF and lack changes that will bolster revenue collection (updating tax brackets and some fees & fines to reflect the depreciation of the Lebanese Pound against the US Dollar exchange rate in the parallel market). In parallel, the agency revealed that the Lebanese government will not issue treasury bills and bonds in the first quarter of 2024. According to S&P, BDL has not participated in government debt auctions since the second half of 2022. Overall, the debt to GDP ratio was estimated at 285% 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 98% in 2023 when translating the local currency debt at the Sayrafa rate.

Standard & Poor’s commented that in the absence of genuine progress on restructuring and reforms, investor and depositor confidence has faded away and customer deposits at banks have sustained their downturn. 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 $27.4 billion at end of year 2023. 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 a contraction of $1.5 billion in the current account deficit over the 2025-2027 period mainly owing to lower imports driven by foreign currency shortages, and strong net remittance inflows.

The agency also noted that in the quasi-absence of external funding, it commented that the government has limited capacity to address the country’s current account deficit and does not expect the Central Bank to continue funding the current account deficit from its FX reserves. According to Standard & Poor’s, and in an effort to alleviate the liquidity crunch in the banking sector, BDL modified one of its circulars in July 2023 which now allows eligible depositors to withdraw $400 monthly and halted the withdrawal of $400 in Lebanese Pounds (at an exchange rate of LBP 15,000 per USD) which was previously allowed. BDL issued a new “mechanism” which will allow for the withdrawal of $150 monthly from USD-denominated bank accounts opened after October 2019. In addition, the agency commented that the devaluation of the Pound and the gradual lifting of subsidies has pushed inflation levels above 221% in 2023. S&P expects the shortage of FX and the high cost of imports to keep inflation in the triple-digit levels during the year 2024.

The agency stated that it could improve the foreign currency issuer credit and issue ratings for Lebanon from “SD” in the event of 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.