Israel-Hezbollah hostilities may dent investor confidence in Lebanon, Moody's says

Continued friction will weigh on investors and foreign currency depositors who are key to Lebanon's economic recovery

A vehicle drives in Adaisseh village near the Lebanese-Israeli border, Lebanon. Reuters

The escalation in hostilities between Israel and Lebanon’s Hezbollah on Sunday increases the geopolitical risk exposure embedded in highly indebted Lebanon’s credit profile, Moody’s Investors Service said on Monday.

The outbreak in cross border violence between Israel and Hezbollah in violation of UN Resolution 1701 that sought to resolve the month long war in 2006 between Tel Aviv and Beirut, will damage the already fragile state of Lebanon’s economy, the rating agency said. It will negatively affect the confidence of investors and depositors of foreign exchange in the country, Moody's said.

“Continued heightened geopolitical tensions between the two factions would weigh on investor and on depositor confidence, thus shifting the balance of growth and government funding risks to the downside from an already very fragile situation,” Elisa Parisi-Capone, vice president and senior analyst at Moody’s said.

The credit rating of Lebanon, whose economy is buckling under the weight of ballooning debt and the cost of hosting more than a million Syrian refugees, was cut deeper into junk by Fitch Ratings last month as its finances continue to stretch thin amid a dwindling flow of foreign exchange from abroad.

Fitch downgraded Lebanon, one of the world’s most indebted nations for the first time in three years, taking its sovereign down two notches to CCC. S&P Global Ratings has affirmed Lebanon’s rating at B-, six steps below investment grade which is one level higher than Moody’s which took a rating action in January.

The International Monetary Fund estimates that Lebanon’s public debt burden will rise further to near 180 per cent of gross domestic product output by 2023. Still, Lebanon has never defaulted on its obligations, and officials have repeatedly ruled out any restructuring since its finance minister floated the idea earlier this year and retracted his statement later.

Earlier this week the country’s central bank governor said Lebanon will preserve its two-decade long peg to the dollar after it secured $1.4 billion in five-year deposits from private non-resident investors.

“Contrary to what is being said, the supply of dollars is ample in the market,” said Riad Salameh in an interview with Bloomberg. “Today, the central bank has closed deals of deposits with private, non-resident institutions, whereby in the second half of August our reserves went up by $1.4bn to reach $38.6bn. This is private non-resident money and not government money," he noted at the time.

Lebanon, maintains its pound to a peg of around 1,507.5 to the dollar. The governor's comments will reassure investors about the country's ability to repay its debt and strengthen its currency, however, situation could change if the ongoing hostilities took a turn for worse in the coming weeks and months.

Mr Salameh also reassured investors that the country had provisioned $1.5bn in cash ahead of the maturity of its Eurobond in November. The yield on its Eurobond maturing in 2021 came under pressure, climbing to more than 19 per cent for the first time ahead of the review by the ratings agencies.

Last year, Lebanon secured commitments from international donors at a conference in Paris mainly to fund infrastructure projects. The pledges were linked to reforms, which include lowering the fiscal deficit by 1 percentage point annually over five years among other measures.