Lebanon's credit rating was downgraded further into junk status by Moody's Investors Service reflecting an increased likelihood of debt rescheduling or other measures that may be defined as default.
Lebanese government's rating was cut to Caa2 from Caa1 and the country remains under review for a further potential downgrade, the agency said on Tuesday.
"Widespread social protests, the resignation of the government and loss of investor confidence have further undermined Lebanon's traditional funding model based on capital inflows and bank deposit growth, threatening the viability of the peg and macroeconomic stability," said Moody's analyst Elisa Parisi-Capone and managing director Marie Diron. The ratings of the country remain on review for a downgrade and its assessment of the likelihood of a debt restructure would be complete within three months, the agency said.
Lebanon saw an outflow of capital estimated at about $3 billion in the first nine months of the year, due to its deteriorating economic climate and heightened political tensions that led to the resignation of prime minister Saad Hariri last month, according to the Institute of International Finance.
The action by the agency came a day after Lebanon's central bank instructed lenders to increase their capital requirement by 20 per cent by the end of June and, for the first time, ordered them to halt distributing dividends. The regulator seeks to ease growing pressure on the financial system in the wake of largest nation-wide protests the country has seen since the 2005 assassination of former prime minister Rafik Hariri. Citizens blame Lebanon's political elite for widespread corruption and nepotism, which they say contributed to the country accruing $86bn of public debt equivalent to 150 per cent of gross domestic product debt.
Lebanon’s economy has struggled since the start of the conflict in neighbouring Syria in 2011 and the political power sharing system, which represents various sects in the country, has held back successive governments from implementing required structural changes recommend by the International Monetary Fund.
"In the absence of rapid and significant policy change, a rapidly deteriorating balance of payments and deposit outflows will bring GDP growth to or below zero, further stoking social discontent, undermining debt sustainability and increasingly threatening the viability of [the Lebanese pound's peg to the US dollar]," Moody's said. Lebanon’s economy is projected to slow to 0.2 per cent this year, from about 0.3 per cent in 2018, according to IMF estimates made before Mr Hariri's resignation.
The protests and resignation of Mr Hariri "have diminished the likelihood of the passage of the 2020 budget and implementation of the agreed reforms", that would allow Lebanon access to $11bn of aid pledged at an international donor conference last year in Paris, the agency said.
The latest downgrade by Moody's is likely to place further pressure on Lebanon's sovereign bonds, on which yields have spiked within the past few months as fears of a default grow.
Moody's estimates, Banque du Liban has a usable foreign exchange buffer of about $5bn to 10bn left to draw from.
"In the absence of new net inflows, these $5bn to 10bn will likely be consumed by the government's forthcoming external debt service payments estimated at $6.5bn this year and next, including the $1.5bn November 28 maturity," the agency said.
The bulk of Lebanon's public debt is held by local banks and the financial system, which underpins the economy, attracted billions of dollars in capital flows that helped the country escape the 2008 global financial crisis and service its fiscal and external deficits since the end of a 15-year civil war in 1990.