Moody’s Investors Service, the international rating agency, published on June 12, 2024 a regular rating update on the Government of Lebanon, maintaining the country’s “C” rating and stable outlook, a rating which reflects that losses for bondholders are likely to exceed 65%. The rating agency cited a set of credit strengths and challenges underlying Lebanon’s rating, with the former pivoting around 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 over the near future. 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.

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. On a positive note, the agency pointed out 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 characterized by weak revenue generation and sizeable transfers to EDL. 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.

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, increasing the pressures on the LBP to USD exchange rate and sparking inflation hikes. The rating agency also mentioned that there has been some progress on monetary and fiscal reforms such as drying out BDL’s budget financing, the quasi-unification of exchange rates, stabilization of money supply and adjustment of customs’ and VAT rates to the market rate.