Moody’s sees growth prospects

Rising interest rates to weigh on debt service

Moody’s said it expects economic growth to improve to 2.5 percent in 2018 and three percent in 2019 from about 1.9 percent this year.

“This is based on expectations of greater economic policy coordination, the winding down of the open conflict in Syria and the expected implementation of the CEDRE investor conference commitments,” the rating agency said in a research report titled ‘Government of Lebanon – B3 Stable, Annual credit analysis’.

Moody’s said the pace of implementation of the policy reforms pledged by Lebanon at the CEDRE conference, allows it to assess the government’s effectiveness going forward. Reforms include cutting the fiscal deficit by one percentage point of GDP per year over the next five years. Participants at the conference, which was held in Paris last April, committed to provide $10.2 billion in concessional loans and $800 million in grants provided the government implements the reforms. Funds will be mainly used to finance infrastructure projects.

The rating agency said its report is an update and does not constitute a rating action, and that the current “stable outlook takes into account Lebanon’s significant foreign exchange buffers, which have proven resilient to political turmoil in recent years.” Moody’s said it would upgrade the country’s credit rating “if fiscal reforms were to result in stabilization – followed by a durable reversal – in the debt trajectory.”

The country’s credit strength is built on a resilient bank deposit base able to fund the government’s financing needs and which is supported by remittances and transfers from expatriates, according to the report. “The sovereign has also established a history of full and timely debt repayment despite severe economic and political turmoil domestically or in the region,” the rating agency said.

The State’s very high debt burden and large fiscal deficits, however, remain a major credit challenge, according to the report. Moody’s said it would downgrade the country’s rating in case of a continued slowdown in deposit inflows as this would indicate a heightened risk of a balance of payments crisis and would undermine the banks’ ability to fund the government.

Rising interest rates would also escalate the debt service.

“Lebanon’s interest-to-revenue ratio of 42.9 percent is the highest of all sovereigns we rate. Combined with an average term to maturity of about five years, this underscores the sovereign’s very high sensitivity to further interest rate rises,” said Elisa Parisi-Capone, a Moody’s Vice President, a Senior Analyst and co-author of the report.