Lebanon's credit outlook improves

The outlook on the 'B-' (B minus) long-term foreign currency ratings of six Lebanese banks - Bank Audi-Audi Saradar Group, BBAC, BLOM Bank, Byblos Bank, Credit Libanais, and Fransabank - has also been changed to Stable. The ratings of the six banks continue to be constrained by the
sovereign ratings.

The change in the sovereign outlook is in response to the improvement in the domestic political climate following the agreement reached by the main political leaders in Doha, Qatar in May and the subsequent election of a new president and formation of a multi-party government. The government's policy statement agreed earlier this week is expected to be endorsed by parliament on August 8 and marks the end of a political impasse that has lasted for almost two years.

A return to relative political normalcy should help to revitalise trade, investment and tourism and increase donor financing. It could also open the way for further progress on economic and social reforms, potentially leading to higher credit ratings, although Capital Intelligence does not expect any significant reforms to take place before the next parliamentary elections, which are due to be held in mid 2009. Constitutional and security issues are likely to dominate the political agenda in the near term, with electoral reform among the most pressing challenges for the new government.

More effective governance and economic reforms are needed to put the public finances on a sustainable footing and reduce the large debt overhang that constrains economic growth and leaves the country vulnerable to exogenous shocks. However, the level of commitment of the main political factions to the medium-term reform programme of fiscal consolidation, privatisation and structural reform presented to international donors at the Paris III conference in January 2007 is not clear and there is a risk that the national unity cabinet, in which opposition parties have been allocated enough seats to veto the decisions of the majority grouping, will be deeply divided and unable to each a consensus on important policy issues.

Capital Intelligence notes that Lebanon has proven remarkably resilient to political and economic shocks and the sovereign has a strong debt-service record. During the past 18 months of political deadlock and heightened inter-communal tensions, foreign capital has continued to flow into the country and central bank foreign exchange reserves have increased, reaching $12.3bn in June 2008.

Government financing needs, which include foreign currency debt service payments of approximately $1.8bn in the second half of 2008 and $4.5bn in 2009, are substantial but manageable.