BLOOMBERG/HASAN SHAABAN
Fitch Rating has downgraded Lebanon’s Bank Audi and Byblos Bank due to the impact of rising political tensions following nearly two weeks of nationwide protests, triggered in part by a currency crisis and struggling economy.
The rating agency downgraded Bank Audi and Byblos Bank’s long-term issuer default rating (IDR) to CCC- from CCC and both lenders were also placed on a negative rating watch, a day after Lebanon’s Prime Minister Saad Hariri stepped down—bowing down to demonstrators’ demands who said they would accept nothing less than the resignation of the government and key officials.
Fitch stated that the downgrade and the negative rating watch reflect heightened liquidity risks confronting Lebanese banks in view of increasing political tensions and social unrest in Lebanon.
The demonstrations have caused a closure of domestic banks for operations since 18 October 2019 and Fitch said that deposit stability is now at greater risk as depositor confidence has also suffered.
Influential Lebanese economists are calling for the government to impose formal restrictions on the movement of money to defend the country’s dollar peg and prevent a run on the banks when they open their doors after nationwide protests.
The negative rating watch reflects the probability of a further downgrade if potential funding stress materially affects the bank's liquidity profile, we expect to resolve the negative rating watch in the near term depending on the evolution of the bank's funding and liquidity position in the current stressful operating environment, said Fitch.
According to Fitch, around 88 per cent of Bank Audi’s deposits and 69 per cent of Byblos Bank deposits were in foreign currency at the end of H1 2019, which increases the vulnerability of the lenders to unexpected outflows.
The longer the banks remain shut, however, the more a backlog in dollar demand builds and speculation swirls about the measures the banks will need to take to avert financial collapse.
Lebanon has been gripped by widescale protests for the past two weeks demanding an end to nepotism and corruption that have led the country’s public debt to soar to $86 billion equivalent to 150 per cent of gross domestic product, one of the highest in the world.
Fitch said that access to foreign currency in the market is stretched and the foreign currency-liquidity management of the banks is largely dependent on Banque du Liban’s ability to meet foreign currency obligations.
The central bank Governor said that a political solution is needed within ‘days’ to avoid economic collapse and restore public confidence but violence and the resignation of Prime Minister Hariri has added to the uncertainty among investors.
The government’s proposals to almost wipe out Lebanon’s budget deficit next year and reduce wasteful spending was criticised by economists as unrealistic, with Moody’s cautioning that the reliance on BdL financing could undermine the country’s currency peg.
The International Monetary Fund said that it was assessing that emergency reform package, adding that reforms should be implemented urgently given the country’s high debt levels and fiscal deficits.
The Washington-based fund expects Lebanon's economic growth to decrease by 0.2 per cent in 2019.
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