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Rising debt: Moody’s downgrades Lebanon’s ratings

Credit rating agency Moody’s has downgraded Lebanon’s ratings as the Middle Eastern country’s debt burden continues to rise.

The agency downgraded long-term issuer ratings to B3 from B2; however, it changed the outlook to stable from negative.

“The rating downgrade is based on Moody’s view that a B3 rating appropriately captures Lebanon’s credit risk profile. The ongoing erosion of Lebanon’s very weak government finances will continue to constrain the rating, pending further clarity on whether recent and prospective fiscal reforms will be effective given the evolving political environment,” Moody’s said in a statement sent out to the media on Saturday.

“While Lebanon’s external liquidity position continues to be strong and banking liquidity ample, rising external imbalances, coupled with a weak growth outlook, increase Lebanon’s vulnerability to external shocks,” the statement read.

Outlook stable

The stable outlook reflects the return to a fully functioning government, which will support reform momentum going forward. Lebanon has a strong track record of servicing debt under stressed conditions and its external buffers have continued to strengthen in recent years, supported
by new deposits and the Central Bank’s operations, Moody’s said.

Lebanon’s local-currency bond and deposit ceilings are unchanged at Ba2. The foreign currency deposit ceiling is lowered to B3 from B2, and the short-term foreign currency deposit ceiling remains at NP (Not Prime, as it does not fall within any of the prime rating categories.)

The foreign currency bond ceiling was changed to B1 from Ba3. These ceilings reflect a range of undiversifiable risks to which issuers in any jurisdiction are exposed, including economic, legal and political risks.

These ceilings act as a cap on ratings that can be assigned to the foreign and local-currency obligations of entities domiciled in the country.

Lebanon’s senior unsecured Medium Term Note Program is also downgraded to (P)B3 from (P)B2, while its other short-term rating is affirmed at (P)NP.

Debt seven times that of revenue

Moody’s estimates Lebanon’s 2018 government debt to reach close to 140 per cent of GDP, the third highest among all rated sovereigns. Government debt has risen inexorably since 2011, when it bottomed out at 121 per cent of GDP, reflecting a deterioration in the fiscal balance.

Other fiscal and debt metrics, such as annual gross financing needs, interest payments as a share of government revenue and debt to revenue, also illustrate the very high burden.

Alarmingly, the agency projects government debt will remain close to 700 per cent of government revenues next year.