Moody’s places Caa1 rating
under review over three months

Downgrade possible depending on government performance

Moody's Investors Service said it has placed the Caa1 issuer rating for the Government of Lebanon under review for three months with a view to a possible downgrade.

“The review, which may extend beyond the usual 90 days, will allow the rating agency to take stock of the government's progress in adopting the 2020 budget as planned before the end of the year,” Moody’s said. It said that extending the review will also allow it to assess the extent to which this progress unlocks confidence-enhancing external support packages through CEDRE investments. The rating agency said this will also allow it to assess the extent to which this progress secures financial support from Lebanon’s allies among the countries of the Gulf Cooperation Council. “[This] in turn would ease immediate liquidity risks and be conducive to a broader growth recovery over the longer term,” it said.

“The decision to place the rating under review for downgrade reflects the recent significant tightening in external financing conditions and the reversal in the bank deposit inflows that are essential in enabling Lebanon to meet the government's financing needs,” the rating agency said.

The government's greater reliance on the foreign exchange reserves of the Central Bank (BDL) to meet bond maturities risks destabilizing BDL’s ability to sustain the currency peg and ensure financial stability over the longer term, according to Moody’s.

The Caa1 rating was a downgrade announced by Moody’s in January 2019. The credit rating agency said at that time: “Moody's decision to downgrade the ratings to Caa1 reflects the heightened risk that the government's response to increased liquidity and financial stability risks will include a debt rescheduling or other liability management exercise that may constitute a default under Moody's definition.”

Last summer, Fitch Ratings downgraded the country’s long-term foreign-currency issuer default rating to ‘CCC’ from ‘B-’ while S&P Global Ratings said it affirms its sovereign credit ratings on Lebanon at 'B-/B' and that the country’s outlook remains negative.

In September, Moody’s said that the Caa1 rating reflects the country’s "Low" economic strength, "Low (-)" institutional strength which underscores its weak governance framework, and low fiscal policy effectiveness, “Very Low (-)" fiscal strength reflecting a high and rising debt burden, and "High" susceptibility to event risk driven through political risk.