The Lebanese central bank has asked lenders to raise their capital by 20 per cent by the end of June 2020 to boost their liquidity and prepare for possible downgrades in credit ratings, according to local newswire, National News Agency.
The Banque du Liban (BdL) said that raising capital by $4 billion will help banks confront the current situation and any future developments particularly in the face of a possible credit downgrade.
Thousands of protesters have been on the streets for weeks, demanding the resignation of a political class they say has pillaged state coffers to the verge of bankruptcy while leaving the public with failing services.
The protests also prompted the resignation of Prime Minister Saad Hariri last week. A replacement is yet to be appointed, raising concerns the country will be unable to implement measures needed to avert economic crisis.
The central bank’s request comes nearly a week after Fitch Ratings downgraded two top Lebanese lenders, Bank Audi and Byblos Bank, to CCC-, the fourth-lowest rank and one level below the sovereign.
Fitch also said that the state’s ability to support banks cannot be relied on given the low sovereign rating and a further downgrade to Lebanon’s credit rating could lead to similar moves on the banks.
Banks tightened informal restrictions on money transfers that were in place prior to the unrest, in an effort to curtail possible capital flight.
Bloomberg reported that Lebanon relies on inflows from millions of Lebanese living abroad to keep its lenders stable and defend the dollar peg. However, capital inflows needed to finance the large current account and fiscal deficits have slowed as confidence has dwindled, while outflows have gathered pace.
According to the Institute of International Finance, capital outflows reached $3 billion in the first nine months of the year and a recovery hinges on political stability and implementation of deep reforms to restore confidence.
Last month, S&P Global Ratings placed Lebanon’s B- grade on negative watch, adding that pressing societal demands and limitations on the country’s institutional capacity to address them could further test depositor confidence and weigh on foreign exchange reserves.