Lebanon’s new government to kick-start fiscal consolidation, says Moody’s

The Arab country’s position is still weak, though, and challenges remain

Lebanese Prime Minister Saad Hariri, who is under pressure to enact much-needed fiscal reforms after forming a new government on Thursday. AP
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The new Lebanese government, instated last week following a nine-month political impasse, is expected to implement much-needed consolidation measures to reverse the country’s economic decline but its fiscal position will remain weak, according to Moody’s.

The rating agency said it expects the new government led by Prime Minister Saad Hariri to roll out measures to unlock the $11 billion aid package committed to Lebanon by international donors at the Cedre conference in Paris last April. The five-year package is to be invested in high-growth areas of the economy, such as telecoms and energy.

“However, in the context of very weak growth, fiscal consolidation will remain very challenging for the government,” said Elisa Parisi-Capone, vice-president and senior analyst at Moody’s, in a statement to media on Friday.

“Moreover, as long as deposit growth remains weak – potentially because of lingering uncertainty about the capacity of the government to shore up macroeconomic stability –  Lebanon’s fiscal and external positions will remain the weakest of the sovereigns we rate.”

Lebanon formed a new government on Thursday, ending months of political wrangling, with a speech by Mr Hariri, who said bold moves were needed to address deep-rooted social, political and economic problems.

Lebanon’s economy has been hit by the war in neighbouring Syria, with annual growth rates falling to between 1 and 2 per cent, compared to 8-10 per cent in the pre-war years.

The International Monetary Fund has forecast low economic growth of around 2-2.5 per cent in 2019, up from 1.5 per cent in 2018 and 1.2 per cent in 2017. It has also urged Lebanon to curb soaring levels of public debt. Lebanon’s debt-to-GDP ratio is the third highest in the world and could balloon to 180 per cent by 2023 from 150 per cent if reforms are not implemented to narrow the deficit, the Washington-based lender said last year.

In January, Moody’s downgraded the ratings of three Lebanese banks – Blom Bank, Byblos Bank and Bank Audi – pushing the country further into ‘junk’ rating territory over concerns of a debt default.

Mr Hariri apologised to the Lebanese people on Thursday for the time it had taken to form the government, and said it must now deliver on promises to rein in public spending and overhaul the economy.