Moody’s downgrades rating to B3, upgrades outlook to stable

The credit rating agency Moody's has downgraded the Sovereign long-term issuer ratings to B3 from B2. The agency also changed the outlook from negative to stable.

Moody's said that the principal driver for the ratings downgrade to B3 from B2 was the rise in the debt burden. According to the rating agency’s estimates, public debt is likely to reach nearly 140 percent of GDP in 2018.

“The ongoing erosion of Lebanon's very weak government finances will continue to constrain the rating,” Moody’s said.

The agency said that the recent fiscal reforms are “very unlikely” to lessen the deficit this year and in 2018.
“External imbalances are wide and rising again,” Moody’s said. In 2016, the trade deficit was $13.6 billion, or 26 percent of GDP, while the current account deficit reached $8.4 billion, or 19 percent of GDP, and is expected to remain high in 2017.

The stable outlook reflects the return to a fully-functioning government, which will support reform momentum going forward, according to Moody's. “Lebanon has a strong track record of servicing debt under stressed conditions, and its external buffers have continued to strengthen in recent years, supported by new deposits and the Central Bank's operations,” it said.

The country has never defaulted, whether on bonds or loans, since Moody's records began in 1983. Its foreign-exchange reserves remain strong and the liquidity risks are contained. Foreign deposit inflows more than offset the current account deficit and they have shown “remarkable resilience to political shocks”, according to Moody’s.

“In order to sustain financial stability, Lebanon requires deposit inflows of around $9 billion this year, and it already received $5.5 billion in new deposits in the first half of 2017,” the rating agency said.