Moody's Investors Service maintained a stable outlook for Lebanese banks on expectations of higher deposit inflows and improved economic growth, but said there are risks from negative political developments.
Lebanon's newly-formed government will provide some respite from months of investor uncertainty, the credit rating agency said in a report on Thursday. However, the incoming government will need to implement significant reforms to ensure its fiscal deficit is sustainable in the long term and to rebuild confidence, Moody's said in a March 21 report.
"We believe that despite a recent slowdown in deposit growth, inflows will be sufficient to allow banks to finance the government and the economy, provided that the new government implements reforms to bolster confidence," said Alexios Philippides, an analyst at Moody’s.
In January, Lebanon's new cabinet pledged to reduce the budget deficit, improve tax collection and fix the country's electricity network. The world's third most indebted country is struggling to control public finances as a result of ballooning public debt, anaemic economic growth and the strain from hosting more than a million Syrian refugees. Lebanon, which has a debt to gross domestic product ratio of around 150 per cent, formed a government in January, after nine months of political wrangling following the May parliamentary elections.
Lebanon’s ability to pay its bondholders, should there be a liquidity crunch, prompted Moody’s Investors Service to downgrade its rating further into junk category in January. S&P Global Ratings revised this month the outlook on Lebanon to negative from stable, amid worries about its ability to pay its foreign debt.
Operating conditions for banks will remain "challenging" in the transition period over the next 12 to 18 months and will depend on the government's ability to implement long-awaited fiscal reforms, Moody's said.
Even if the government successfully implements reforms, it will take time to restore investor confidence and sustain economic recovery, it said. This is reflected in Moody's forecast of 1.3 per cent GDP growth in 2019 and 1.5 per cent in 2020.
Successful economic reforms would lift growth and help narrow the fiscal deficit, which would in turn stabilise the banks’ very large and growing exposure to the heavily-indebted government. Signs of fiscal consolidation would shore up depositor confidence, raise the prospect of higher financial inflows and reduce the risk premiums that banks pay for deposits.
Moody's expects domestic loan growth at Lebanese banks to be "flat". This is because high interest rates on loans and subdued economic growth will lower demand for credit. On the other hand, a renewed $1.1 billion economic stimulus package by the central bank for 2019 that promotes subsidised loans for housing and specific sectors, will stoke some demand.
Banks' profitability will be under pressure from higher funding costs, subdued new business and higher provisioning charges, according to the report. Lenders will cope with these challenges by controlling costs and growth abroad.
Lebanese banks have large exposure to sovereign debt and that remains the biggest financial risk besides the element of political risk.
"Political developments affecting the pace of economic reform and depositor confidence are a key risk for Lebanese banks," Moody's said.
Lebanon's government has "limited capacity" to support failing banks and so there is no uplift for the banks' credit ratings, despite strong government incentives to provide support, Moody's said.