Sovereign rating and banks downgraded

Growing public debt burden
cited as driver behind measure

Moody's Investors Service has downgraded Lebanon's government bond ratings to B2 from B1, this week and maintained the negative outlook.

The principal driver of Moody's decision is the rise in the country's debt burden, a report of the rating agency said. Moody’s estimates the 2015 government debt to reach close to 140 percent of the Gross Domestic Product (GDP), the third highest among all rated sovereigns. Government debt has risen every year since 2011, when it was at 123 percent.

Other debt metrics, such as annual gross financing needs, interest payments as a share of government revenue and debt to revenue, indicated an even greater burden, the report said. Moody’s projects that the Government debt will reach 632 percent of its revenues next year, the second highest among all rated sovereigns.

The second driver of the rating action is the adverse spillover effects of the Syrian crisis. A combination of lower growth and ongoing political paralysis from this situation has led to a large increase in the fiscal deficit, in turn raising the debt burden.

“We cannot ignore the importance of Moody’s downgrade, but the impact on the economy would be greater if this downgrade came from Standard and Poor’s. The scope of rating by S&P is wider and also covers the banking sector,” said former Finance Minister Raya Hassan. “The financial risks facing Lebanon are already contained by the market and the parties exposed to the sovereign debt, mainly banks,” she said.

Moody’s forecasted that GDP will only average 2.1 percent in 2015. The fiscal deficit has been rising since 2011 and will likely average closer to ten percent of GDP in 2014 and 2015.

Given the negative outlook, Moody’s said that an upgrade of the sovereign rating is unlikely over the medium term. However, Moody’s would return the rating outlook to stable in the event the debt metrics stop rising and the risk of political spillover from Syria's conflict diminishes.

Any upward ratings movement is contingent on a significant improvement in government finances, which would reduce the budget deficit and lower the government's borrowing requirements, the report said.

Moody's could downgrade Lebanon's B2 government bond rating, in the event of a further deterioration of the country's main debt metrics or an intensification of domestic political turmoil.

Following the downgrade of Lebanon’s sovereign rating, Moody’s also downgraded the ratings of Bank Audi, Blom Bank and Byblos Bank, to B2 from B1, with a negative outlook. The reason for this action is the direct exposure of these banks to the sovereign debt risk, and their regional expansion is not sufficient to compensate for this risk exposure. “Banks have been resilient and have maintained depositors’ confidence, but have been subject to many pressures in recent years,” said Hassan.