S&P Global Ratings has placed Lebanon’s ‘B-‘long and ‘B’ short-term foreign and local currency sovereign credit ratings on credit watch with negative implications, adding that the placement reflects the risk to the sovereign creditworthiness from rising fiscal, financial and monetary pressures.
CI Ratings has also downgraded Lebanon’s long-term foreign currency rating and long-term local currency ratings with a negative outlook reflect the government’s increasing financing risks arising from significant weaknesses in the public finances, large public indebtedness as well as impaired access to international capital markets and weak economic performance.
The International Monetary Fund projects Lebanon’s current-account deficit will reach almost 30 per cent of GDP by the end of this year. It predicts that economic growth, stagnant at 0.3 per cent in 2018, would continue to be weak. Public debt is projected to increase to 155 per cent of GDP by the end of 2019.
S&P stated that pressing societal demands and limitations on Lebanon's institutional capacity to address them could further test depositor confidence and weigh on foreign exchange reserves.
The rating agency said that the placement indicates at least a one-in-two chances that we could lower the ratings following its review of Lebanon's policy response to economic and social pressures and its effectiveness in restoring depositor confidence.
“While we still expect that the Banque Du Liban's usable reserves remain sufficient to service government debt in the near term, risks to government creditworthiness have risen relative to our previous assumptions,” said S&P.
Last year, the central bank has been absorbing banks’ local currency liquidity through certificates of deposit and financial engineering operations to reduce speculative attacks on the currency through currency conversion—measures which bought fiscal authorities time to establish an economic and budgetary plan.
Lebanon refinancing risks have intensified since our last review amid apparent shifts in investor sentiment and risk appetite, which have driven government bond yields to very high levels and made it more difficult for the government to tap international markets, added CI Ratings.
Additionally, the increase in non-resident and total deposits provided reliable funding for current account and fiscal deficits, however, the trend changed in 2019 due to weak investor confidence and rising risks to the currency peg as well as notwithstanding higher interest rates.
According to S&P Global, deposit outflows totalled $2.1 billion for the first eight months of 2019.