Moody’s Investors Service, the international rating agency, published on November 26, 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, financial & 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 constrained by weak revenue generation. 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, the escalation of the conflict with Israel since October 2 resulted in many casualties and the destruction of infrastructure. Moody’s stated in this respect that this conflict has worsened the already frail credit situation in Lebanon and hampers the government’s efforts to stabilize the economy. According to the World Bank’s estimates, the cost of physical damages were around $3.4 billion, while economic losses were circa $5.1 billion (which are estimated to have slashed Lebanon’s GDP growth for 2024 by 6.6%). The rating agency also mentioned that there has been some progress on the monetary and fiscal reforms fronts 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. Moody’s noted, however, that these policy measures are not enough for a full recovery from the crisis. More specifically, the agency stated that bank deposits remain frozen and the banking sector is unable to provide credit. Moody’s mentioned that the approval of the 2024 budget on time is a crucial first step, yet it commented that stronger efforts are required to strengthen public finances. The agency also stated that progress in other critical reforms (namely governance, transparency, and accountability) remains limited.