UPDATE: Lebanon’s outlook
downgraded by Moody's

Cites rising risks to liquidity position and financial stability

Moody's Investors Service said it has changed the outlook on the Lebanese government to negative from stable and that it affirmed the ratings at B3.

“The negative outlook reflects an increase in risks to the government's liquidity position and the country's financial stability, in large part as a consequence of domestic and geopolitical risks that have become more intractable,” the credit rating agency said in a statement.

Moody's said it would change the outlook to stable if the government implements significant reforms. These reforms are required in order to unlock the CEDRE public investment package, raise GDP growth prospects, and restore investors' and depositors' confidence as well as deposit growth.

Minister of Finance Ali Hassan Khalil said that Moody’s change in outlook underscores the importance of forming a new Cabinet and starting the implementation of reforms in order to recover confidence, reduce risks, and cut the deficit.

“If it is possible to achieve this now, we should do it,” he said. “Otherwise we might lose that opportunity a number of months from now if the negative outlook remains.”

The affirmation of the B3 rating is based on the assumption that the Cabinet will be formed in the near term and will implement some fiscal consolidation. The rating affirmation also takes into account the ability of the Central Bank (BDL) to maintain some financial stability “although the effectiveness of its financial operations may be diminishing.”

According to Moody’s, the implementation of reforms that result in a positive economic impact “would support the effectiveness of BDL's measures aimed at channeling financing for the government at sustainable costs while maintaining financial stability.”

The rating agency said it has revised the budget deficit projected for 2018 to 10.5 percent of GDP from 8.9 percent. It expects the fiscal deficit to slightly narrow to 9.5 percent of GDP in 2019 and to 9.0 percent in 2020.

The country’s large foreign exchange reserves, which stood at $34.6 billion at the end of October 2018, cover imports of goods and services for more than 13 months. These reserves can also cover significant conversions of lira deposits into U.S. dollars in a stress scenario. “However, foreign exchange reserves are less ample when assessing financial stability risks related to potential deposit outflows or lower inflows,” Moody’s said.