Moody's affirms Lebanon's sovereign ratings

Lebanon's low B3 government bond ratings have been on negative outlook since November 2006. This reflects the daunting political and economic challenges facing the country and the very weak credit standing of the Lebanese government, which has the highest debt burden of any country rated by Moody's. The negative outlook signals the likely direction of a move, should a rating change be necessary.

"Moody's typically reserves ratings below B3 for governments that are very close to or are already in default. The Lebanese government is not in default, nor has it ever defaulted, defying many observers' past expectations and indicating a strong willingness to repay," explains Tristan Cooper, Vice President - Senior Analyst in Moody's Sovereign Risk Unit.

According to Moody's, there are a number of supporting credit factors that justify maintaining Lebanon's rating at B3, albeit with a negative outlook.

A key factor is that the central bank of Lebanon still has a large stock of foreign currency reserves with which to protect the exchange rate peg and finance external payments if necessary. At the end of 2007, these reserves amounted to around $9.8bn, or 40% of GDP. Local commercial banks, the largest holders of government debt in Lebanon, continue to purchase and roll over government paper. Although banks are increasingly reluctant to finance the government's wide fiscal deficit, they have little choice given the devastating impact that a government default would have on their own performance. Banks' ability to finance the government continues to be bolstered by rising bank deposits, which have historically shown a high level of resilience to shocks.

Moody's also notes that Lebanon's government continues to receive support from external donors, who are likely to remain committed given the country's sensitive geopolitical position. Budgetary support pledged at the January 2007 Paris III donors' conference is now being disbursed, albeit gradually. At the beginning of February 2008, the government had so far received around $1bn in a combination of grants, loans and debt relief out of a total of $4.7bn pledged for budgetary support. Finally, inward remittances remain buoyant, providing support to the vulnerable balance of payments.

Despite these reassurances, Moody's acknowledges the very poor creditworthiness of the government of Lebanon and the unsettling volatility of the country's political and economic environment. "It should also be noted that the severity of a government default, should it occur, would likely be relatively high given the large size of the debt stock and the fact that around half of it is denominated in foreign currencies, the value of which could jump in local currency terms in the event of an exchange rate depreciation," cautions Mr Cooper. However, Moody's maintains that these negative credit characteristics are already well captured by its current low sovereign ratings and negative outlook for Lebanon.